XML 31 R10.htm IDEA: XBRL DOCUMENT

EXCLUSIVE DISTRIBUTION AGREEMENT

6 Months Ended

Oct. 31, 2011

5. EXCLUSIVE DISTRIBUTION AGREEMENT

On September 10, 2009, the Company and Simulscribe, entered into a Reseller Agreement pursuant to which Simulscribe will provide, and the Company became the exclusive reseller of, Simulscribe’s voice to text (“VTT”) services to wholesale customers. Pursuant to the agreement, the Company also assumed all of Simulscribe’s wholesale customers. The Company paid $3.5 million and issued a two-year promissory note for an additional $3.5 million for the assumption of the wholesale customer relationships and the exclusivity rights. This promissory note was paid in full in April 2011. Additionally, the Company will pay a fee for the services provided by Simulscribe, and will pay up to an additional $10 million if the revenues generated from the Simulscribe services meet certain performance milestones within the first three years of the agreement (the “Additional Payments”), subject to acceleration in certain events, such as the Company’s failure to use commercially reasonable efforts to market the services or a change of control of the Company at a time that revenues from these services are on track to result in the payment ultimately being made. For the three and six months ended October 31, 2010, the Company recognized $41,000 and $83,000, respectively, of interest expense associated with amortizing the $0.3 million discount on the note as a component of other income (expense), net in the Condensed Consolidated Statements of Operations.

The Additional Payments are convertible into the Company’s common stock at Simulscribe’s option, and may be converted into the Company’s common stock at a conversion price of $5.00 per share; provided that if a specified revenue target is met then up to $5.0 million of the Additional Payments can be converted at $4.00 per share. The value of the additional payments has not been recorded as of the date of the transaction pursuant to the accounting guidance related to the issuance of equity-based instruments to non-employees for the purchase of goods or services, as it is not probable of incurrence. In the event that payouts under the Additional Payments provisions of the agreement become probable of occurrence based on an assessment of customer revenue streams and the remaining duration of agreement and/or the conditions of the payout are met, the Company will record the fair value of the Additional Payments at that time.

As a result of this agreement, the Company recorded the total consideration at a fair value of $6.7 million and recorded assets associated with the exclusive distribution rights and transfer of customers. The value assigned to the intangible assets, which are recorded in other assets on the face of the Condensed Consolidated Balance Sheet, was determined by valuing the discounted potential cash flows associated with each asset over the four year term of the agreement. The asset associated with the transferred customer relationships will be amortized, on a tax deductible basis, to sales and marketing expense ratably over the four year term of the agreement and the asset associated with the distribution rights will be amortized, on a tax deductible basis, to cost of revenue on a unit of revenue basis, similar to a royalty payment, at the rate of 25% of revenue recognized based on the base level of revenue anticipated in the agreement attributable to the $7.0 million of consideration issued to date. The Company recorded amortization expense associated with the distribution rights of approximately $0.5 million for each of the six months ended October 31, 2011 and 2010, respectively; and amortization expense associated with the transfer of customers of approximately $0.3 million for each of the six month periods ended October 31, 2011, and 2010. The Company recorded amortization expense associated with the distribution rights of approximately $0.3 million and $0.2 million for the three months ended October 31, 2011 and 2010, respectively, and amortization expense associated with the transfer of customers of approximately $0.2 million for the three months ended October 31, 2011 and 2010. Subsequent to executing the agreement, the Company hired one of the principle officers of Simulscribe to assume the position of Chief Strategy Officer at the Company. His primary focus was on expansion of the wholesale market for voice transcription service. This individual continues to hold a large ownership interest in Simulscribe. As such, although he may have input into key decisions related to interaction between the Company and Simulscribe, the final decisions rest with the executive management team, of which he is not a member, and/or the Board of Directors. This individual was also a major shareholder in Grid.com, which the Company acquired in February 2010. In the third quarter of fiscal 2011, the Chief Strategy Officer resigned; however, he continues to provide certain services to the Company as a consultant.

In the fourth quarter of fiscal 2010, the Company and Simulscribe, entered into an Amendment No. 1 to Reseller Agreement (the “Amendment”), amending the Reseller Agreement previously entered into between the Company and Simulscribe on September 10, 2009. Primarily, the Amendment permits the Company to provide services to all VTT customers, both retail and wholesale. Among other things, the Amendment also contains additional changes to the Reseller Agreement to conform to the new structure, and provides that both the retail and wholesale services will count as “Additional Payments” for purposes of determining what amount, if any, of the $10.0 million contingent consideration will be paid to Simulscribe. In consideration for the Amendment, the Company agreed to pay an additional $0.3 million in seven equal quarterly installments. The Company recognized this consideration as an addition to the customer relationship intangible asset, which amount is being amortized over the remainder of the 4 year life assigned to the original customer relationship intangible asset in September 2009. Four of the seven quarterly installments totaling $0.2 million were paid in cash. In April 2011, the promissory note for $3.5 million was paid in full 5 months early. In exchange for early payment of the promissory note, Simulscribe waived the final three installment payments totaling $0.1 million, due under the Amendment. As of April 30, 2011, this obligation had been paid in full.

The carrying value of the related intangible assets acquired, which are included in other assets, was as follows (in thousands):

	October 31, 2011
	Gross		Accumulated
	Value		Amortization			Impairment		Net Value
Distribution Agreement Intangible Assets:
Customer relationships	$	2,514	$	(1,420	)	$	—	$	1,094
Distribution rights	4,440		(1,640		)	—		2,800
Total	$	6,954	$	(3,060	)	$	—	$	3,894

	April 30, 2011
	Gross		Accumulated
	Value		Amortization			Impairment		Net Value
Distribution Agreement Intangible Assets:
Customer relationships	$	2,514	$	(1,105	)	$	—	$	1,409
Distribution rights	4,440		(1,125		)	—		3,315
Total	$	6,954	$	(2,230	)	$	—	$	4,724

Estimated future amortization expense for the customer relationship related intangible asset as of October 31, 2011 is as follows (in thousands):

	Years ended April 30,

2012 (six months)	$	315
2013	581
2014	198

	$	1,094

Since the distribution rights are being amortized based on the level of revenue recognized, the amortization expense cannot be estimated for future periods.