Exhibit 99.4
UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information and related notes present the historical financial statements of Sirius XM Holdings Inc. (“Sirius XM”) and Pandora Media, Inc. (“Pandora”), as if the completion of the transactions (as defined below) had occurred on the dates specified below.
On September 23, 2018, Sirius XM entered into an agreement and plan of merger and reorganization by and among Sirius XM, Pandora, Billboard Holding Company Inc., a wholly-owned subsidiary of Pandora, Billboard Acquisition Sub, Inc., a wholly-owned subsidiary of Billboard Holding Company, Inc., White Oaks Acquisition Corp, a wholly-owned subsidiary of Sirius XM, and Sirius XM Radio Inc., a wholly-owned subsidiary of Sirius XM (as may be amended from time to time, the “Merger Agreement”). On February 1, 2019, pursuant to the terms of the Merger Agreement, through a series of transactions, Pandora became an indirect wholly-owned subsidiary of Sirius XM (the “transactions”).
The unaudited pro forma condensed combined consolidated financial information reflects the estimated aggregate consideration of approximately $2.9 billion, which represents the estimated fair value of Sirius XM common stock issued on the closing of the transactions, estimated value of Sirius XM replacement equity awards attributable to pre-combination service and the fair value of the Pandora preferred stock investment, in each case as valued as of January 30, 2019. The Pandora preferred stock investment, which is all owned by Sirius XM and is accounted for as a related party fair value instrument, has been cancelled in connection with the completion of the transactions and therefore, to reflect the cost to Sirius XM of such cancellation, the fair value of the Pandora preferred stock investment is included in the calculation of total estimated consideration being paid by Sirius XM. The consideration used in the application of acquisition accounting may differ from the amount determined as of January 30, 2019 as Sirius XM finalizes its calculation of the total consideration transferred.
The unaudited pro forma condensed combined consolidated financial information related to the transactions was prepared using the acquisition method of accounting and is based on the assumption that the transactions took place as of September 30, 2018 for purposes of the unaudited pro forma balance sheet and as of January 1, 2017 for purposes of the unaudited pro forma condensed combined consolidated statements of operations for the year ended December 31, 2017 and the nine month period ended September 30, 2018.
In accordance with the acquisition method of accounting, the actual consolidated financial statements of Sirius XM will reflect the transactions only from and after the date of the completion of the transactions. Sirius XM has undertaken a preliminary analysis of the fair value of Pandora’s assets and liabilities, however, it will not complete the final purchase price allocation related to the transactions until later in 2019. The preliminary allocation of the purchase price to the acquired assets and assumed liabilities set forth below was based upon the preliminary estimate of fair values of certain intangible assets as discussed below. For the preliminary estimate of fair value of these assets assumed, Sirius XM used publicly available benchmarking information as well as a variety of other company specific assumptions, including market participant assumptions. Accordingly, the unaudited pro forma adjustments are preliminary and subject to change as additional information becomes available and additional analyses of these assets, as well as other assets and liabilities to be assumed, are performed. The final acquisition accounting could result in material differences, which could have a material impact on the accompanying unaudited pro forma condensed combined consolidated financial statements and Sirius XM’s future results of operations and financial position.
The unaudited pro forma condensed combined consolidated financial information is presented for illustrative purposes only and does not purport to represent what the results of operations or financial position of Sirius XM would actually have been had the transactions occurred on the dates noted above,
or to project the results of operations or financial position of Sirius XM for any future periods. The unaudited pro forma adjustments are based on available information and certain assumptions that Sirius XM’s management believes are reasonable. The unaudited pro forma adjustments are directly attributable to the transactions and are expected to have a continuing impact on the results of operations of Sirius XM. In the opinion of Sirius XM’s management, all adjustments necessary to present fairly the unaudited pro forma condensed combined consolidated financial information have been made.
The accompanying unaudited pro forma condensed combined consolidated financial information should be read in conjunction with the notes hereto along with Pandora’s most recent historical financial information incorporated by reference to this Registration Statement and Sirius XM’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (“SEC”) on October 24, 2018, Sirius XM’s Annual Report on 10-K filed with the SEC on January 31, 2018, Pandora’s Quarterly Report on Form 10-Q filed with the SEC on November 5, 2018 and Pandora’s Annual Report on Form 10-K filed with the SEC on February 26, 2018.
SIRIUS
XM AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2018
| in thousands | Sirius XM As Reported | Pandora As Reported | Pro Forma Adjustments | Ref | Reclassification and Others | Ref | Pro Forma Combined Sirius XM | |||||||||||||||||
| ASSETS | ||||||||||||||||||||||||
| Current assets: | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 46,044 | $ | 287,523 | $ | 333,567 | ||||||||||||||||||
| Short-term investments | — | 100,119 | 100,119 | |||||||||||||||||||||
| Receivables, net | 245,768 | 373,418 | 619,186 | |||||||||||||||||||||
| Inventory, net | 19,514 | — | 19,514 | |||||||||||||||||||||
| Related party current assets | 10,087 | — | 10,087 | |||||||||||||||||||||
| Prepaid content acquisition costs | — | 32,219 | 32,219 | |||||||||||||||||||||
| Prepaid expenses and other current assets | 173,035 | 25,673 | 198,708 | |||||||||||||||||||||
| Total current assets | 494,448 | 818,952 | 1,313,400 | |||||||||||||||||||||
| Property and equipment, net | 1,498,297 | 107,802 | (39,257 | ) | Note (2) | 1,566,842 | ||||||||||||||||||
| Intangible assets, net | 2,505,384 | 55,557 | 1,367,889 | (b) | 39,257 | Note (2) | 3,968,087 | |||||||||||||||||
| Goodwill | 2,289,985 | 178,917 | 959,191 | (c) | 3,428,093 | |||||||||||||||||||
| Related party long-term assets | 1,018,740 | — | (554,352 | ) | (d) | 464,388 | ||||||||||||||||||
| Deferred tax assets | 330,998 | — | 363,670 | (e) | 694,668 | |||||||||||||||||||
| Other long-term assets | 135,655 | 11,575 | 147,230 | |||||||||||||||||||||
| Total assets | $ | 8,273,507 | $ | 1,172,803 | $ | 2,136,398 | $ | — | $ | 11,582,708 | ||||||||||||||
| Current liabilities: | ||||||||||||||||||||||||
| Accounts payable and accrued expenses | $ | 799,094 | $ | 28,406 | 239,865 | (f) | $ | 1,067,365 | ||||||||||||||||
| Accrued liabilities | — | 72,311 | (72,311 | ) | (f) | — | ||||||||||||||||||
| Accrued content acquisition costs | — | 123,910 | — | (123,910 | ) | (f) | — | |||||||||||||||||
| Accrued interest | 84,973 | — | 2,043 | (f) | 87,016 | |||||||||||||||||||
| Accrued compensation | — | 45,687 | (45,687 | ) | (f) | — | ||||||||||||||||||
| Current portion of deferred revenue | 1,921,517 | 55,678 | 1,977,195 | |||||||||||||||||||||
| Current maturities of long-term debt | 4,411 | — | 4,411 | |||||||||||||||||||||
| Related current liabilities | 4,380 | — | 4,380 | |||||||||||||||||||||
| Total current liabilities | 2,814,375 | 325,992 | — | — | 3,140,367 | |||||||||||||||||||
| Deferred revenue | 154,145 | — | 154,145 | |||||||||||||||||||||
| Long-term debt | 6,562,152 | 255,272 | 6,817,424 | |||||||||||||||||||||
| Related party long-term liabilities | 5,889 | — | — | 5,889 | ||||||||||||||||||||
| Deferred tax liabilities | 8,169 | — | 348,390 | (j) | 356,559 | |||||||||||||||||||
| Other long-term liabilities | 104,152 | 25,660 | (588 | ) | (e) | 129,224 | ||||||||||||||||||
| Total liabilities | 9,648,882 | 606,924 | 347,802 | — | 10,603,608 | |||||||||||||||||||
| Redeemable convertible preferred stock | — | 513,270 | (513,270 | ) | (d) | — | ||||||||||||||||||
| Stockholders’ (deficit) equity | ||||||||||||||||||||||||
| Common stock | 4,449 | 27 | 365 | (g) | 4,841 | |||||||||||||||||||
| Accumulated other comprehensive income (loss), net of tax | 12,448 | (471 | ) | 471 | 12,448 | |||||||||||||||||||
| Additional paid-in capital | 922,376 | 1,632,178 | 752,570 | (g) | 3,307,124 | |||||||||||||||||||
| Treasury stock, at cost | (6,287 | ) | (6,287 | ) | ||||||||||||||||||||
| Accumulated deficit | (2,308,361 | ) | (1,579,125 | ) | 1,548,460 | (g) | (2,339,026 | ) | ||||||||||||||||
| Total stockholders’ (deficit) equity | (1,375,375 | ) | 52,609 | 2,301,866 | — | 979,100 | ||||||||||||||||||
| Total liabilities, redeemable convertible preferred stock and stockholders’ (deficit) equity | $ | 8,273,507 | $ | 1,172,803 | $ | 2,136,398 | $ | — | $ | 11,582,708 | ||||||||||||||
See accompanying notes to unaudited pro forma combined condensed consolidated financial statements.
SIRIUS
XM AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018
| in thousands, except per share data | Sirius XM As Reported | Pandora As Reported | Pro Forma Adjustments for Pandora | Ref | Reclassifications and Other Adjustments | Ref | Pro Forma Combined Sirius XM | Ref | ||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Subscriber revenue | $ | 3,418,485 | $ | 344,175 | — | $ | (673 | ) | (f) | $ | 3,761,987 | |||||||||||||||
| Advertising revenue | 135,477 | 777,480 | — | 912,957 | ||||||||||||||||||||||
| Equipment revenue | 112,628 | — | — | 112,628 | ||||||||||||||||||||||
| Other revenue | 608,194 | — | — | 673 | (f) | 608,867 | ||||||||||||||||||||
| Total revenue | 4,274,784 | 1,121,655 | — | — | 5,396,439 | |||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Cost of services* | 1,736,055 | 765,515 | (13,523 | ) | (a) | 59,020 | (f) | 2,547,067 | ||||||||||||||||||
| Subscriber acquisition costs | 351,940 | — | 351,940 | |||||||||||||||||||||||
| Sales and marketing | 344,426 | 374,351 | (250 | ) | (a) | (69,347 | ) | (f) | 649,180 | |||||||||||||||||
| Engineering, design and development | 89,133 | 118,788 | (291 | ) | (a) | (5,870 | ) | (f) | 201,760 | |||||||||||||||||
| General and administrative | 263,110 | 142,521 | (550 | ) | (a) | (30,029 | ) | (f) | 375,052 | |||||||||||||||||
| Depreciation and amortization | 222,345 | — | 97,125 | (a) | 29,553 | (f) | 349,023 | |||||||||||||||||||
| Total operating expenses | 3,007,009 | 1,401,175 | 82,511 | (16,673 | ) | 4,474,022 | ||||||||||||||||||||
| Income (loss) from operations | 1,267,775 | (279,520 | ) | (82,511 | ) | 16,673 | 922,417 | |||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Interest expense | (262,924 | ) | (20,799 | ) | — | — | (283,723 | ) | ||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | (16,673 | ) | (f) | (16,673 | ) | ||||||||||||||||||
| Other income (expense) | 82,334 | 6,033 | — | (73,880 | ) | (d) | 14,487 | |||||||||||||||||||
| Total other expense | (180,590 | ) | (14,766 | ) | — | (90,553 | ) | (285,909 | ) | |||||||||||||||||
| Income (loss) before income taxes | 1,087,185 | (294,286 | ) | (82,511 | ) | (73,880 | ) | 636,508 | ||||||||||||||||||
| Income tax (expense) benefit | (162,344 | ) | 6,933 | 20,215 | (h) | 18,101 | (h) | (117,095 | ) | |||||||||||||||||
| Net income (loss) | $ | 924,841 | $ | (287,353 | ) | $ | (62,296 | ) | $ | (55,779 | ) | $ | 519,413 | |||||||||||||
| Foreign currency translation | (9,972 | ) | (241 | ) | — | — | (10,213 | ) | ||||||||||||||||||
| Change in net unrealized loss on marketable securities | — | (13 | ) | — | — | (13 | ) | |||||||||||||||||||
| Total comprehensive income (loss) | $ | 914,869 | $ | (287,607 | ) | $ | (62,296 | ) | $ | (55,779 | ) | $ | 509,187 | |||||||||||||
| Basic net income (loss) per common share | $ | 0.21 | $ | (1.19 | ) | $ | 0.107 | |||||||||||||||||||
| Diluted net income (loss) per common share | $ | 0.20 | $ | (1.19 | ) | $ | 0.104 | |||||||||||||||||||
| Basic weighted average common shares outstanding | 4,482,249 | 260,327 | 4,874,114 | (i) | ||||||||||||||||||||||
| Diluted weighted average common shares outstanding | 4,586,346 | 260,327 | 4,978,211 | (i) | ||||||||||||||||||||||
| Dividends declared per common share | $ | 0.033 | $ | — | $ | 0.033 | ||||||||||||||||||||
| * | Cost of services excludes the impact of depreciation and amortization. |
See accompanying notes to unaudited pro forma combined condensed consolidated financial statements.
SIRIUS
XM AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2017
| in thousands, except per share data | Sirius XM As Reported | Pandora As Reported | Pro Forma Adjustments for Pandora | Ref | Reclassifications and Other Adjustments | Ref | Pro Forma Combined Sirius XM | Ref | ||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||
| Subscriber revenue | $ | 4,472,522 | $ | 315,853 | — | $ | (744 | ) | (f) | $ | 4,787,631 | |||||||||||||||
| Advertising revenue | 160,347 | 1,074,927 | — | 1,235,274 | ||||||||||||||||||||||
| Equipment revenue | 131,586 | — | — | 131,586 | ||||||||||||||||||||||
| Other revenue | 660,674 | 76,032 | — | 744 | (f) | 737,450 | ||||||||||||||||||||
| Total revenue | 5,425,129 | 1,466,812 | — | — | 6,891,941 | |||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Cost of services* | 2,101,982 | 967,067 | (15,290 | ) | (a) | 65,046 | (f) | 3,118,805 | ||||||||||||||||||
| Subscriber acquisition costs | 499,492 | — | 499,492 | |||||||||||||||||||||||
| Sales and marketing | 437,739 | 492,542 | (3,049 | ) | (a) | (73,467 | ) | (f) | 853,765 | |||||||||||||||||
| Engineers, design and development | 112,427 | 154,325 | (2,270 | ) | (a) | (8,144 | ) | (f) | 256,338 | |||||||||||||||||
| General and administrative | 334,023 | 190,711 | (733 | ) | (34,345 | ) | (f) | 489,656 | ||||||||||||||||||
| Depreciation and amortization | 298,602 | — | 129,500 | (a) | 41,607 | (f) | 469,709 | |||||||||||||||||||
| Impairment of goodwill | — | 131,997 | 131,997 | |||||||||||||||||||||||
| Contract termination fees | — | 23,044 | (23,044 | ) | (f) | — | ||||||||||||||||||||
| Total operating expenses | 3,784,265 | 1,959,686 | 108,158 | (32,347 | ) | 5,819,762 | ||||||||||||||||||||
| Income (loss) from operations | 1,640,864 | (492,874 | ) | (108,158 | ) | 32,347 | 1,072,179 | |||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||
| Interest expense | (345,820 | ) | (29,335 | ) | — | — | (375,155 | ) | ||||||||||||||||||
| Loss on extinguishment of debt | (43,679 | ) | — | — | — | (43,679 | ) | |||||||||||||||||||
| Other income (expense) | 12,844 | 3,024 | — | (32,819 | ) | (d)(f) | (16,951 | ) | ||||||||||||||||||
| Total other expense | (376,655 | ) | (26,311 | ) | — | (32,819 | ) | (435,785 | ) | |||||||||||||||||
| Income (loss) before income taxes | 1,264,209 | (519,185 | ) | (108,158 | ) | (472 | ) | 636,394 | ||||||||||||||||||
| Income tax (expense) benefit | (616,301 | ) | 790 | 41,641 | (h) | 182 | (h) | (573,688 | ) | |||||||||||||||||
| Net income (loss) | $ | 647,908 | $ | (518,395 | ) | $ | (66,517 | ) | $ | (290 | ) | $ | 62,706 | |||||||||||||
| Foreign currency translation | 18,546 | 553 | — | — | 19,099 | |||||||||||||||||||||
| Change in net unrealized loss on marketable securities | — | 52 | — | — | 52 | |||||||||||||||||||||
| Total comprehensive income (loss) | $ | 666,454 | $ | (517,790 | ) | $ | (66,517 | ) | $ | (290 | ) | $ | 81,857 | |||||||||||||
| Basic net income (loss) per common share | $ | 0.14 | $ | (2.29 | ) | $ | 0.012 | |||||||||||||||||||
| Diluted net income (loss) per common share | $ | 0.14 | $ | (2.29 | ) | 0.012 | ||||||||||||||||||||
| Basic weighted average common shares outstanding | 4,637,553 | 243,637 | 5,029,418 | (i) | ||||||||||||||||||||||
| Diluted weighted average common shares outstanding | 4,723,535 | 243,637 | 5,115,400 | (i) | ||||||||||||||||||||||
| Dividends declared per common share | $ | 0.041 | $ | — | $ | 0.041 | ||||||||||||||||||||
| * | Cost of services excludes the impact of depreciation and amortization. |
See accompanying notes to unaudited pro forma combined condensed consolidated financial statements.
Note 1—Basis of Pro Forma Presentation
The unaudited pro forma condensed combined consolidated balance sheet as of September 30, 2018 and the unaudited pro forma condensed combined consolidated statements of operations for the nine months ended September 30, 2018 and for the year ended December 31, 2017 are based on (i) the historical unaudited consolidated financial statements of Sirius XM as of and for the nine months ended September 30, 2018 contained in Sirius XM’s Quarterly Report on Form 10-Q filed with the SEC on October 24, 2018, (ii) the historical audited consolidated financial information of Sirius XM for the year ended December 31, 2017 contained in Sirius XM’s Annual Report on 10-K filed with the SEC on January 31, 2018, (iii) the historical unaudited consolidated financial statements of Pandora as of and for the nine months ended September 30, 2018 contained in Pandora’s Quarterly Report on Form 10-Q filed with the SEC on November 5, 2018 and (iv) the historical audited consolidated financial information of Pandora for the year ended December 31, 2017 contained in Pandora’s Annual Report on Form 10-K filed with the SEC on February 26, 2018.
The pro forma adjustments are included only to the extent they are (i) directly attributable to the transactions (ii) factually supportable and (iii) with respect to the unaudited pro forma statements of operations, expected to have a continuing impact on the combined results.
The unaudited pro forma condensed combined consolidated financial information is presented for illustrative purposes only and does not purport to represent what the results of operations or financial position of Sirius XM would actually have been had the transactions occurred in prior periods, or to project the results of operations or financial position of Sirius XM for any future periods. The unaudited pro forma adjustments are based on available information and certain assumptions that Sirius XM’s management believes are reasonable. The unaudited pro forma adjustments are directly attributable to the transactions and are expected to have a continuing impact on the results of operations of Sirius XM. In the opinion of Sirius XM’s management, all adjustments necessary to present fairly the unaudited pro forma condensed combined financial information have been made.
Note 2—Estimated Consideration and Pro Forma Purchase Price Allocation
Estimated Consideration
As required by acquisition accounting, an estimate of such consideration has been made at estimated fair value of approximately $2.9 billion, which represents the estimated fair value of Sirius XM common stock issued on the closing of the transactions, estimated value of Sirius XM replacement equity awards attributable to pre-combination service and the fair value of the Pandora preferred stock investment, in each case as valued as of January 30, 2019. The Pandora preferred stock investment, which is all owned by Sirius XM and is accounted for as a related party fair value instrument, has been cancelled in connection with the completion of the transactions and therefore, to reflect the cost to Sirius XM of such cancellation, the fair value of the Pandora preferred stock investment is included in the calculation of total estimated consideration being paid by Sirius XM. The consideration used in the application of acquisition accounting may differ from the amount determined as of January 30, 2019 as Sirius XM finalizes its calculation of the total consideration transferred.
The estimated consideration is as follows:
| (in thousands except for share data) | ||||
| Pandora common stock outstanding at January 30, 2019 | 272,128,212 | |||
| Exchange ratio | 1.44 | |||
| Sirius XM common stock to be issued | 391,864,625 | |||
| Price per share of Sirius XM common stock as of January 30, 2019 | $ | 5.92 | ||
| Estimated value of Sirius XM common stock to be issued to Pandora stockholders pursuant to the transactions | $ | 2,319,839 | ||
| Estimated value of Sirius XM replacement equity awards attributable to pre-combination service* | $ | 65,301 | ||
| Estimated consideration of Sirius XM common stock and replacement equity awards for pre-combination service | $ | 2,385,140 | ||
| Sirius XM’s Pandora preferred stock investment (related party fair value instrument) cancelled | $ | 523,687 | ||
| Total estimated consideration for transactions | $ | 2,908,827 | ||
| Value attributed to par at $0.001 par value | $ | 392 | ||
| Balance to capital in excess of par value | $ | 2,319,447 | ||
| * | The estimated value of Sirius XM replacement equity awards attributable to pre-combination service is based on the estimated fair value of restricted stock units and stock options that will be assumed by Sirius XM upon completion of the transactions. ASC 805 requires that the fair value of replacement awards attributable to pre-combination service be included in the consideration transferred. The majority of this amount is related to restricted stock units and is based on the market price of Pandora common stock of $8.49 as of January 30, 2019. |
Preliminary Purchase Price Allocation
In accordance with the acquisition method of accounting, the actual consolidated financial statements of Sirius XM will reflect the transactions only from and after the date of the completion of the acquisition. Sirius XM has undertaken a preliminary analysis of the fair value of Pandora’s assets and liabilities, however, it will not complete its final purchase price allocation related to the transactions until later in 2019. The preliminary allocation of the purchase price to the acquired assets and assumed liabilities was based upon the preliminary estimate of fair values of certain intangible assets as discussed below. For the preliminary estimate of fair values of these assets assumed, Sirius XM used publicly available benchmarking information as well as a variety of other company specific assumptions, including market participant assumptions. Accordingly, the unaudited pro forma adjustments are preliminary and subject to change as additional information becomes available and additional analyses of these assets, as well as other assets and liabilities to be assumed, are performed. The final acquisition accounting could result in material differences, which could have a material impact on the accompanying unaudited pro forma condensed combined consolidated financial statements and Sirius XM’s future results of operations and financial position.
The following table sets forth a preliminary allocation of the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed of Pandora using Pandora’s unaudited consolidated balance sheet as of September 30, 2018, with the excess recorded to goodwill:
| (in thousands) | ||||
| Current assets | $ | 818,952 | ||
| Property and equipment | 68,545 | |||
| Intangible assets (estimated fair value) | 1,462,703 | |||
| Deferred Tax Assets | 363,670 | |||
| Long term assets | 11,575 | |||
| Total assets | 2,725,445 | |||
| Current liabilities | (325,992 | ) | ||
| Long-term debt | (255,272 | ) | ||
| Other long term liabilities | (25,072 | ) | ||
| Deferred tax liabilities | (348,390 | ) | ||
| Total liabilities | (954,726 | ) | ||
| Net assets acquired (a) | 1,770,719 | |||
| Estimated merger consideration (b) | 2,908,827 | |||
| Estimated goodwill (b) - (a) | $ | 1,138,108 | ||
| Elimination of existing Goodwill recorded by Pandora | $ | (178,917 | ) | |
| Additional Goodwill recorded as a result of the transactions | $ | 959,191 | ||
Intangible Assets
Preliminary identifiable intangible assets in the unaudited pro forma condensed combined consolidated financial information consist of the following:
| (in thousands, except for estimated useful life) Intangible Assets | Book Value as of September 30, 2018 (Excluding AdsWizz) (a) | Reclassifications from Property and Equipment (b) | Estimated Fair Value as of September 30, 2018 (Excluding AdsWizz) (c) | Pro Forma Adjustment (c - a - b) | Estimated Useful Life | Fair Value Range | ||||||||||||||
| Trademark | $ | 77 | $ | — | $ | 470,000 | $ | 469,923 | Indefinite | $280,000 - $660,000 | ||||||||||
| Customer Relationships | — | — | 632,000 | 632,000 | 8 - 10 years | $330,000 - $935,000 | ||||||||||||||
| Developed Technology | 14,777 | 39,257 | 320,000 | 265,966 | 5 years | $120,000 - $520,000 | ||||||||||||||
| Total | $ | 14,854 | $ | 39,257 | $ | 1,422,000 | $ | 1,367,889 | ||||||||||||
| Book Value as of September 30, 2018 (AdsWizz) (d) | Estimated Fair Value as of September 30, 2018 (Total) (c + d) | |||||||
| Trademark | $ | 547 | $ | 470,547 | ||||
| Customer Relationships | 10,952 | 642,952 | ||||||
| Developed Technology | 29,204 | 349,204 | ||||||
| Total | $ | 40,703 | $ | 1,462,703 | ||||
Sirius XM has assessed the value of intangible assets related to Pandora’s acquisition of AdsWizz Inc. on May 25, 2018 at carrying value as of September 30, 2018, $40,703. Accordingly a fair value analysis was performed by an independent third party to determine the fair value of the net assets acquired from AdsWizz. This valuation was completed on July 31, 2018 and represents the best available information at this time. For purposes of the pro forma financial statements, we included this amount at carrying value.
The amortization related to the identifiable intangible assets is reflected as a pro forma adjustment in the unaudited pro forma condensed combined consolidated statements of operations based on the estimated
useful lives above and as further described in Note 3(a). The identifiable intangible assets and related amortization are preliminary and are based on management’s estimates after consideration of similar transactions. As discussed above, the amount that will ultimately be allocated to identifiable intangible assets, and the related amount of amortization, may differ materially from this preliminary allocation. In addition, the amortization impacts will ultimately be based upon the periods in which the associated economic benefits or detriments are expected to be derived or, where appropriate, based on the use of a straight-line method. Therefore, the amount of amortization following the transactions may differ significantly between periods based upon the final value assigned and amortization methodology used for each identifiable intangible asset.
Property and Equipment
The following table presents the net book value, reclassification adjustments and pro forma fair value of property and equipment by asset class in the unaudited pro forma combined condensed consolidated balance sheet as of September 30, 2018. We reclassified the net book value of ‘Software developed for internal use—customer facing’ to Intangible Assets, as this technology was included in the estimated fair value of Developed Technology determined above. Sirius XM has not yet undertaken a detailed analysis of the fair value of Pandora’s property and equipment and therefore all other property and equipment has been recorded at cost basis in the unaudited pro forma combined condensed consolidated balance sheet as of September 30, 2018.
| Book Value as of September 30, 2018 | Reclassification to Intangible Assets | Pro Forma Fair Value as of September 30, 2018 | ||||||||||
| Property and equipment, net | ||||||||||||
| Servers, computers and other related equipment | $ | 18,864 | $ | — | $ | 18,864 | ||||||
| Software developed for internal use—customer facing | 39,257 | (39,257 | ) | — | ||||||||
| Software developed for internal use—other | 10,462 | — | 10,462 | |||||||||
| Leasehold improvements | 18,678 | — | 18,678 | |||||||||
| Construction in progress | 17,482 | — | 17,482 | |||||||||
| Office furniture and equipment | 3,059 | — | 3,059 | |||||||||
| Total property and equipment, net | $ | 107,802 | $ | (39,257 | ) | $ | 68,545 | |||||
Note 3—Pro Forma Adjustments
| (a) | Depreciation and amortization |
The adjustment for the nine months ended September 30, 2018 and year ended December 31, 2017 reverses historical depreciation of developed technology and historical amortization of intangible assets, and includes the addition for estimated amortization of pro forma intangible assets based on their estimated useful life.
| Pro Forma Nine Months Ended September 30, 2018 | Pro Forma 12 Months Ended December 31, 2017 | |||||||
| Reversal of Pandora’s historical depreciation related to developed technology | $ | (10,059 | ) | $ | (8,258 | ) | ||
| Reversal of Pandora’s historical amortization related to intangible assets | (4,555 | ) | (13,084 | ) | ||||
| Amortization of purchased identifiable intangible assets | 97,125 | 129,500 | ||||||
| Net change to depreciation and amortization | $ | 82,511 | $ | 108,158 | ||||
| (b) | Reflects the estimated fair value of additional intangible assets identified and the elimination of certain existing intangibles. See “Intangible Assets” discussion in Note 2 above. | |
| (c) | Reflects the impact of pro forma adjustments to goodwill based on the preliminary purchase price allocation discussed above. | |
| (d) | The adjustment eliminates the impact of the Pandora preferred stock investment, which included a $73,880 and $472 unrealized gain recorded in Sirius XM’s financial statements during the nine months ended September 30, 2018 and year ended December 31, 2017, respectively. | |
| (e) | Sirius XM management has performed a preliminary analysis of Pandora’s net operating losses of approximately $973 million as of December 31, 2017 and additional estimated net operating losses of approximately $294 million for the nine months ended September 30, 2018. Based on this preliminary analysis, no limitation as to the total value of such net operating losses was identified under Section 382 of the Code. However, there may be limitations on the amount of net operating losses that can be used by Sirius XM within a specific year. The pro forma adjustment considers the estimated taxable income of the combined entity through September 30, 2018 and therefore, the valuation allowance previously recorded in Pandora’s financial statements related to such net operating losses will no longer be recorded post-combination. Upon completion of the final analysis, the pro forma financial information presented above will be updated. | |
| (f) | The adjustment represents reclassifications to conform Pandora’s financial statement presentation and accounting policies to those of Sirius XM. Specifically, within the unaudited pro forma combined condensed consolidated balance sheet, current liabilities have been reclassified between financial statement captions to conform to Sirius XM’s presentation. Specifically, within the unaudited pro forma combined condensed consolidated statements of comprehensive income, refer to the table below for the reclassifications and adjustments made to the consolidated statements of comprehensive income for the nine months ended September 30, 2018 and year ended December 31, 2017. Sirius XM is still in the process of evaluating the pro forma adjustments necessary to conform the accounting policies of Pandora to those of Sirius XM and expects further adjustments may be necessary as Sirius XM conducts a more detailed review of Pandora’s accounting policies. |
| For the Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||
| Reclassifications and other adjustments | ||||||||||||||||||||||||
| Bad debt expense, credit card fees, and other customer service and billing costs | Depreciation and amortization | Loss on extinguishment of debt | Elimination of SXM Unrealized Gain on Investment Ref (d) | Other Revenue | Total Ref (d)(f) | |||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Subscriber revenue | $ | (673 | ) | $ | (673 | ) | ||||||||||||||||||
| Advertising revenue | — | |||||||||||||||||||||||
| Equipment revenue | — | |||||||||||||||||||||||
| Other revenue | 673 | 673 | ||||||||||||||||||||||
| Total revenue | — | — | — | — | — | — | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Cost of services | 68,760 | (9,740 | ) | 59,020 | ||||||||||||||||||||
| Subscriber acquisition costs | — | |||||||||||||||||||||||
| Sales and marketing | (58,839 | ) | (10,508 | ) | (69,347 | ) | ||||||||||||||||||
| Engineering, design and development | (5,870 | ) | (5,870 | ) | ||||||||||||||||||||
| General and administrative | (9,921 | ) | (3,435 | ) | (16,673 | ) | (30,029 | ) | ||||||||||||||||
| Depreciation and amortization | 29,553 | 29,553 | ||||||||||||||||||||||
| Impairment of goodwill | — | |||||||||||||||||||||||
| Contract termination fees | — | |||||||||||||||||||||||
| Total operating expenses | — | — | (16,673 | ) | — | — | (16,673 | ) | ||||||||||||||||
| Income from operations | — | — | 16,673 | — | — | 16,673 | ||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||
| Interest expense | — | |||||||||||||||||||||||
| Loss on extinguishment of debt | (16,673 | ) | (16,673 | ) | ||||||||||||||||||||
| Other income (expense) | (73,880 | ) | (73,880 | ) | ||||||||||||||||||||
| Total other expense | — | — | (16,673 | ) | (73,880 | ) | — | (90,553 | ) | |||||||||||||||
| For the Year Ended December 31, 2017 | ||||||||||||||||||||||||||||
| Reclassifications and other adjustments | ||||||||||||||||||||||||||||
| Bad debt expense, credit card fees, and other customer service and billing costs | Depreciation and amortization | Contract Termination Fees | Loss on sales of subsidiaries | Elimination of SXM Unrealized Gain on Investment Ref (d) | Other Revenue | Total Ref (d)(f) | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||||||
| Subscriber revenue | $ | (744 | ) | $ | (744 | ) | ||||||||||||||||||||||
| Advertising revenue | — | |||||||||||||||||||||||||||
| Equipment revenue | — | |||||||||||||||||||||||||||
| Other revenue | 744 | 744 | ||||||||||||||||||||||||||
| Total revenue | — | — | — | — | — | — | — | |||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||
| Cost of services | 73,743 | (8,697 | ) | 65,046 | ||||||||||||||||||||||||
| Subscriber acquisition costs | — | |||||||||||||||||||||||||||
| Sales and marketing | (53,924 | ) | (19,543 | ) | (73,467 | ) | ||||||||||||||||||||||
| Engineering, design and development | (8,144 | ) | (8,144 | ) | ||||||||||||||||||||||||
| General and administrative | (19,819 | ) | (5,223 | ) | (9,303 | ) | (34,345 | ) | ||||||||||||||||||||
| Depreciation and amortization | 41,607 | 41,607 | ||||||||||||||||||||||||||
| Impairment of goodwill | — | |||||||||||||||||||||||||||
| Contract termination fees | (23,044 | ) | (23,044 | ) | ||||||||||||||||||||||||
| Total operating expenses | — | — | (23,044 | ) | (9,303 | ) | — | — | (32,347 | ) | ||||||||||||||||||
| Income from operations | 32,347 | |||||||||||||||||||||||||||
| Other income (expense): | ||||||||||||||||||||||||||||
| Interest expense | — | |||||||||||||||||||||||||||
| Loss on extinguishment of debt | — | |||||||||||||||||||||||||||
| Other income (expense) | (23,044 | ) | (9,303 | ) | (472 | ) | (32,819 | ) | ||||||||||||||||||||
| Total other expense | — | — | (23,044 | ) | (9,303 | ) | (472 | ) | — | (32,819 | ) | |||||||||||||||||
| (g) | Reflects the impact of the following equity activity: |
| Elimination of Pandora common stock | $ | (27 | ) | |
| Par value of Sirius XM common stock | 392 | |||
| Total adjustment of common stock | 365 | |||
| Elimination of Pandora additional paid-in capital | $ | (1,632,178 | ) | |
| Estimated value of Sirius XM additional paid-in capital | 2,319,447 | |||
| Estimated value of Sirius XM replacement equity awards attributable to the pre-combination service | 65,301 | |||
| Total adjustment to additional paid-in capital | 752,570 | |||
| Elimination of Pandora accumulated deficit | $ | 1,579,125 | ||
| Loss on cancellation of Pandora preferred stock investment (related party note receivable) | (30,665 | ) | ||
| Total adjustment to accumulated deficit | 1,548,460 |
| (h) | The adjustment to income taxes was calculated by applying Sirius XM’s statutory tax rate at September 30, 2018 and December 31, 2017 of approximately 24.5% and 38.5%, respectively, to the taxable pro forma adjustments. | |
| (i) | As of January 30, 2019, Sirius XM intends to issue approximately 392 million shares of Sirius XM common stock to Pandora stockholders and Pandora employees upon completion of the transactions. Therefore, pro forma shares used to compute earnings per share were calculated using Sirius XM’s historical weighted average shares outstanding at September 30, 2018 and December 31, 2017, plus the approximately 392 million shares that will be issued in connection with the transactions. | |
| (j) | Adjusts the deferred tax liabilities resulting from the transactions. The estimated increase in deferred tax liabilities to $348.4 million stems primarily from the fair value adjustments related to intangible assets excluding goodwill, based on an estimated tax rate of 24.5%. This estimate of deferred income tax balances is preliminary and subject to change based on Sirius XM’s final determination of the fair value of assets acquired and liabilities assumed by jurisdiction. |