Business Combination

9 Months Ended

Sep. 30, 2013

Business Combination [Abstract]

Business Combination

Note 5. Business Combination

RightHand IT Corporation

On January 13, 2012, we executed an Asset Purchase Agreement to acquire certain assets and assume certain liabilities of RightHand IT Corporation (“RHIT”), a managed service provider for small business located in Louisville, Colorado.  No stock was acquired as part of the transaction. The acquisition deepened our small business expertise and enabled us to grow our business by providing services to small business customers.

We engaged an independent third-party appraisal firm to assist in determining the fair value of assets acquired and liabilities assumed from the transaction.  Such a valuation requires management to make significant estimates, especially with respect to intangible assets.  These estimates are based on historical experience and information obtained from the management of the acquired company.  We placed value on RHIT’s existing customer relationships, as well as non-compete agreements signed by certain key employees.  The purchase price for RHIT exceeded the fair value of RHIT’s net tangible and intangible assets acquired.  As a result, we have recorded goodwill in connection with this transaction.  The amortization of this goodwill is deductible for tax purposes.

We paid a total of $1.4 million in cash including $300,000 held in escrow against payment of a milestone-based earn-out.  The earn-out consisted of two criteria-based milestones that were met by specific dates through 2012.  The probability-weighted fair value of the $300,000 payment was $277,000.  As a result, we recorded the $23,000 difference as other current assets on our condensed consolidated balance sheets.  The balance of this asset was zero at December 31, 2012 since all criteria-based milestones have been achieved.

The tangible and identifiable intangible assets acquired and liabilities assumed, and resulting goodwill are summarized below.  The financial information presented includes purchase accounting adjustments to the tangible and intangible assets:

	Amount (in thousands)			Amortization Period
Accounts receivable	$	151
Prepaid expenses and other current assets		46
Total current assets		197
Property and equipment, net		108
Other assets		28
Acquired assets		333
Other accrued liabilities		(106	)
Short-term deferred revenue		(49	)
Assumed liabilities		(155	)
Net assets assumed		178
Identifiable intangible assets:
Non-compete		70		36 months
Customer base		460		60 months
Goodwill		619
Total purchase consideration		1,327
Other current asset		23
Total cash consideration	$	1,350

The operating results of RHIT have been included in our accompanying condensed consolidated statements of operations from January 14, 2012, the day following acquisition.  Pro-forma results of operations have not been presented because the acquisition was not material to our results of operations.  In addition to the $1.4 million cash consideration, we incurred acquisition-related expenditures of approximately $33,000 through June 30, 2012, which were expensed in the periods in which they were incurred in accordance with ASC 805, Business Combinations. These expenses were recorded in general and administrative expense in our condensed consolidated statements of operations.