9. ACQUISITION

On June 7, 2011, the Company acquired key assets and assumed certain liabilities of SmartReply, a mobile marketing company located in Irvine, California, through a series of transactions in which, among other things, SmartReply contributed the targeted assets and liabilities to its newly formed subsidiary and the Company subsequently acquired all of the capital stock of that newly formed entity. SmartReply had been delivering mobile marketing solutions to approximately 40 companies, including many of the top retail brands in North America. The purchase of SmartReply is consistent with our strategy to expand our capabilities and customer base in mobile marketing and the excess of the purchase price over the net assets acquired represents potential revenue enhancements/synergies from our existing customer base and the assembled workforce of SmartReply. We allocated the total purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the closing date and recorded the excess of purchase price over the aggregate fair values as goodwill. The goodwill balance is not tax deductible. Revenues generated from clients acquired as part of the SmartReply asset acquisition during the three and nine months ended September 30, 2011 were $1.2 million and $1.5 million, respectively.

The acquisition included cash payments of $2.6 million upon closing with the remaining $591,000 paid in the third quarter of 2011. Approximately $1.0 million of the purchase price has been placed into escrow to secure the sellers’ representations and indemnifications and is expected to be distributed to the selling shareholders over the next 24 months. Contingent consideration in the form of an earn-out, for a maximum of $8.9 million, will be paid annually over the next three years based upon year-over-year revenue growth relative to the Company’s mobile services business. Transaction costs related to the SmartReply acquisition totaled $550,000 and have been reported in the Consolidated Statement of Operations within general and administrative expenses for the nine month period ending September 30, 2011. The acquisition has been accounted for under the purchase method of accounting and accordingly, the results of operations of SmartReply have been included in the accompanying financial statements in the periods following the date of acquisition. The Company recorded deferred tax liabilities of $905,000, primarily related to the intangible assets acquired with SmartReply, and released a corresponding amount of its deferred tax asset valuation allowance. The $905,000 release of the valuation allowance was recognized as a benefit for income taxes during the nine month period ending September 30, 2011. Pro forma results of SmartReply’s operations have not been presented because the effect of this acquisition was not material to the Consolidated Statement of Operations.

The purchase price has been allocated to the assets acquired and liabilities assumed based on fair value, with any excess recorded as goodwill. None of the acquired intangible assets, including goodwill, are deductible for tax purposes. The components of the purchase price allocation are as follows (in thousands):


Purchase Price:
Cash paid	$	3,150
Contingent consideration		1,158

Total.	$	4,308


Allocations:
Current assets	$	756
Property and equipment		50
Intangible assets:
Customer relationships		2,330
Trade name		28
Deferred tax liability		(905	)
Goodwill		2,726

Total assets acquired		4,985
Current liabilities assumed		(677	)

Total net assets acquired	$	4,308

The Company is amortizing its identifiable intangible assets acquired in connection with the SmartReply transaction over the estimated useful lives of two to three years using methods that most closely relate to the depletion of these assets. Estimated annual amortization expense for the next five years related to the intangible assets is as follows (in thousands):


Year ending December 31,	Amount
2011	$	688
2012		907
2013		569
2014		194
2015		—

Total	$	2,358

The Company has historically managed and presented its operations as a single reporting segment. As a result of the above transaction, management is considering modifications to the management structure and internal reporting to align with the integration of the new business. For the three and nine months ended September 30, 2011, the Company has reported its business as a single reporting segment, as the Company’s chief decision maker, who is the Chief Executive Officer, only evaluated the Company on a consolidated basis through September 30, 2011. As the management structure and internal reporting structure are refined, the Company may re-assess its reporting segments.