Business Combination

9 Months Ended

Sep. 30, 2014

Business Combinations [Abstract]

Business Combination

I. SMS Acquisition

On February 11, 2014, the Company, through its wholly-owned subsidiary, SpendSmart Networks, Inc., acquired substantially all of the assets of Intellectual Capital Management, Inc., d/b/a SMS Masterminds (“SMS”) a Nevada corporation, including but not limited to certain intellectual property and accounts receivable, pursuant to the terms of an Asset Purchase Agreement (the “Asset Purchase Agreement”).

Pursuant to the Asset Purchase Agreement, the Company acquired substantially all of the assets of SMS. In consideration of the purchased assets, the Company agreed to issue to SMS five million two hundred and fifty thousand shares of the Company’s common stock and a cash payment of $1.4 million, of which $400,000 has been deferred.  The Company paid $375,000 during the nine months ended September 30, 2014 to the sellers related to this deferment.  $25,000 of this deferment remains outstanding as of September 30, 2014 and will be paid out at $5,000 per quarter over the next five quarters.

The Company also agreed to pay the sellers an earn-out payment relating to fifteen percent of the earnings generated by the SMS after the acquisition and an additional earn-out payment tied to the EBITDA of the Company after the acquisition of SMS, of up to $2,000,000 in aggregate.  The Company paid $0 during the nine months ended September 30, 2014 related to this earn-out payment.

The fair value of the total consideration at the date of acquisition is as follows:

Consideration Paid
Cash Paid and to be paid - to sellers	$	1,400,000
5,250,000 Common Stock issued to SMS		3,313,598
Fair value of earn-out payment		607,798
Total Consideration Paid	$	5,321,396

The transaction was accounted for using the acquisition method required by Topic 805, Business Combinations. Accordingly, goodwill has been measured as the excess of the total consideration including the fair value of any non-controlling interest on acquisition date over the amounts assigned to the identifiable assets acquired and liabilities assumed.

On the acquisition date, the fair value of net assets acquired was $5,321,396. The fair value of stock issued to the seller as part of the consideration was based on reference to quoted market values of SSPC stock as of the date of acquisition. We had originally estimated the fair value of the earn-out liability to be $846,785 and then revised the amount to $607,798 upon review of additional information during the measurement period.  The final allocation of the total consideration to the fair value of the assets acquired and liabilities assumed as of the date of the acquisition is as follows:

Accounts receivable, net	$	318,708
Identifiable intangible assets		3,242,900
Goodwill		2,458,375
Total assets		6,019,983
Accounts payable and accrued expenses		222,268
Deferred Revenue		249,797
Long-term liabilities (SBA loan)		226,522
Total liabilities		698,587
Net assets acquired	$	5,321,396

Fair valuation methods used for the identifiable net assets acquired in that acquisition make use of projected and discounted cash flows using company specific interest rates. IP/Technology, Customer Base, and Trademarks are being amortized over ten years using the straight-line method. Amortization expense and accumulated amortization related to intangible assets totaled $77,180 and $202,681 for the three and nine months ended September 30, 2014, respectively. Amortization expense related to intangible assets will be $283,754 for the year ended December 31, 2014, $324,290 for each of the years ended December 31, 2015 through 2023, and $40,536 in the year ended December 31, 2024.

II. TechXpress Web Acquisition

On September 18, 2014, the Company through its wholly-owned subsidiary SpendSmart Networks, CA, purchased substantially all of the web related assets of TechXpress, Inc. (“TechXpress”), a California corporation, pursuant to the terms of an Asset Purchase Agreement (the “Asset Purchase Agreement”). In consideration of the purchased assets, the Company agreed to pay a purchase price consisting of $454,641 in cash and shares of the Company’s common stock, $0.001 par value per share, equal to $438,518, or an aggregate of 596,315 shares of the Company’s common stock (the “Stock Consideration”).

The preliminary fair value assigned to the total consideration is as follows:

Consideration Paid:
Cash consideration	$	454,641
596,315 common stock issued to TechXpress		438,518
Total consideration paid	$	893,159

The transaction was accounted for using the acquisition method required by Topic 805, Business Combinations. Accordingly, goodwill has been measured as the excess of the total consideration including the fair value of any non-controlling interest on acquisition date over the amounts assigned to the identifiable assets acquired and liabilities assumed.

On the acquisition date, the fair value of net assets acquired was $893,159. The fair value of stock issued to the seller as part of the consideration was based on reference to quoted market values of SSPC stock as of the date of acquisition.  The preliminary allocation of the total consideration to the fair value of the assets acquired as of the date of the acquisition is as follows:

Accounts receivable, net	$	5,758
Identifiable intangible assets		169,600
Goodwill		717,801
Net assets acquired	$	893,159

Fair valuation methods used for the identifiable net assets acquired in that acquisition make use of projected and discounted cash flows using company specific interest rates.  Amortization expense and accumulated amortization related to intangible assets totaled $707 and $707 for the three and nine months ended September 30, 2014, respectively. Amortization expense related to intangible assets will be $4,947 for the year ended December 31, 2014, $16,960 for each of the years ended December 31, 2015 through 2023, and $12,014 in the year ended December 31, 2024.

III.  Pro forma

The following unaudited pro forma financial information presents results as if the acquisition of SMS Masterminds and the TechXpress Web business had occurred on January 1, 2013 (in thousands):

	Three Months Ended September 30,
(Unaudited)	2014		2013
Total revenue	$	1,820	$	1,109
Net loss	$	(2,636)	$	(3,601)

	Nine Months Ended September 30,
(Unaudited)	2014		2013
Total revenue	$	3,695	$	1,965
Net income (loss)	$	(8,174)	$	(11,410)

For purposes of the pro forma disclosures above, the primary adjustments for the three and nine months ended September 30, 2014 and September 30, 2013 include the amortization of the intangible assets purchased in the acquisition.