BUSINESS COMBINATIONS

9 Months Ended

Sep. 30, 2013

BUSINESS COMBINATIONS

BUSINESS COMBINATIONS

3. BUSINESS COMBINATIONS

Livemocha, Inc.

On April 1, 2013, the Company completed its acquisition of Livemocha (the “Livemocha Merger”). Livemocha is one of the world’s largest online language-learning communities with over 16 million registered members. The acquisition of Livemocha’s technology platform will accelerate the Company’s transition to cloud-based learning solutions and reinforces its leadership position in the competitive language-learning industry. The aggregate amount of consideration paid by the Company was $8.4 million in cash.

The acquisition of Livemocha resulted in goodwill of approximately $4.9 million, none of which is deductible for tax purposes. This amount represents the residual amount of the total purchase price after allocation to the assets acquired and liabilities assumed.

All expenditures incurred in connection with the Livemocha Merger were expensed and are included in operating expenses. Transaction costs incurred in connection with the Merger were $0.4 million during the nine months ended September 30, 2013. The results of operations for Livemocha have been included in the consolidated results of operations for the period April 1, 2013 through September 30, 2013.

The Company has preliminarily allocated the purchase price based on current estimates of the fair values of assets acquired and liabilities assumed in connection with the Livemocha acquisition. The table below summarizes the preliminary estimates of fair value of the Livemocha assets acquired, liabilities assumed and related deferred income taxes as of the acquisition date. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill. The Company expects to finalize the purchase accounting for the acquisition of Livemocha, including determining the final valuations for assets and liabilities, by the time it files its Annual Report on Form 10-K for the year ending December 31, 2013.

The preliminary purchase price is allocated as follows (in thousands):

Cash	$	191
Accounts receivable	267
Other current assets	92
Fixed assets	35
Accounts payable and accrued expenses	(901		)
Deferred revenue	(794		)
Net deferred tax liability	(1,161		)
Net tangible assets acquired	(2,271		)
Goodwill	5,142
Amortizable intangible assets	5,500
Preliminary purchase price	$	8,371

The acquired amortizable intangible assets and the related estimated useful lives consist of the following (in thousands):

	Preliminary Estimated Useful Lives	Preliminary Estimated Value April 1, 2013
Online community	3 years	$	1,800
Enterprise relationships	5 years	100
Technology platform	5 years	3,400
Tradename	2 years	200
Total assets		$	5,500

In connection with the Livemocha Merger, the Company recorded deferred tax liabilities related to definite-lived intangible assets that were acquired.  As a result of this deferred tax liability balance, the Company reduced its deferred tax asset valuation allowance by $1.2 million. Such reduction was recognized as an income tax benefit in the consolidated statements of operations for the nine months ended September 30, 2013.

Lexia Learning Systems, Inc.

On August 1, 2013, the Company completed its acquisition of Lexia (the “Lexia Merger”). Lexia is one of the most trusted and established companies in the reading technology market. The transaction marks the Company’s first extension beyond language learning and takes the Company deeper into the EdTech industry.  The aggregate amount of consideration paid by the Company was $21.1 million in cash, net of working capital and deferred revenue adjustments, including a holdback of $3.4 million with 50% of such holdback to be paid within 30 days of the Company filing its Form 10-K for the year ended December 31, 2013 and 50% of such holdback to be paid on the 18 month anniversary of the acquisition.

The acquisition of Lexia resulted in goodwill of approximately $9.9 million, none of which is deductible for tax purposes. This amount represents the residual amount of the total purchase price after allocation to the assets acquired and liabilities assumed.

All expenditures incurred in connection with the Lexia Merger were expensed and are included in operating expenses. Transaction costs incurred in connection with the Lexia Merger were $0.1 million during the three and nine months ended September 30, 2013. The results of operations for Lexia have been included in the consolidated results of operations for the period August 1, 2013 through September 30, 2013.

The Company has preliminarily allocated the purchase price based on current estimates of the fair values of assets acquired and liabilities assumed in connection with the Lexia acquisition. The table below summarizes the preliminary estimates of fair value of the Lexia assets acquired, liabilities assumed and related deferred income taxes as of the acquisition date. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill. The Company expects to finalize the purchase accounting for the acquisition of Lexia, including determining the final valuations for assets and liabilities, within one year of the acquisition date.

The preliminary purchase price is allocated as follows (in thousands):

Cash	$	263
Accounts receivable	2,404
Other current assets	105
Fixed assets	255
Accounts payable and accrued expenses	(899		)
Deferred revenue	(1,223		)
Net deferred tax liability	(4,210		)
Net tangible assets acquired	(3,305		)
Goodwill	9,938
Amortizable intangible assets	14,500
Preliminary purchase price	$	21,133

The acquired amortizable intangible assets and the related estimated useful lives consist of the following (in thousands):

	Preliminary Estimated Useful Lives	Preliminary Estimated Value August 1, 2013
Enterprise relationships	10 years	9,400
Technology platform	7 years	4,100
Tradename	5 years	1,000
Total assets		$	14,500

In connection with the Lexia Merger, the Company recorded deferred tax liabilities related to definite-lived intangible assets that were acquired.  As a result of this deferred tax liability balance, the Company reduced its deferred tax asset valuation allowance by $4.2 million. Such reduction was recognized as an income tax benefit in the consolidated statements of operations for the three and nine months ended September 30, 2013.

Pro Forma Adjusted Summary

The results of Livemocha and Lexia’s operations have been included in the consolidated financial statements subsequent to the acquisition date.

The following schedule presents unaudited consolidated pro forma results of operations data as if the Livemocha and Lexia Mergers (“the Mergers”) had occurred on January 1, 2012. This information does not purport to be indicative of the actual results that would have occurred if the Mergers had actually been completed on the date indicated, nor is it necessarily indicative of the future operating results or the financial position of the combined company (in thousands, except per share amounts):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2013			2012			2013			2012
Revenue	$	61,193		$	65,261		$	189,146		$	197,269
Net income (loss)	$	(4,756	)	$	(36,853	)	$	(21,505	)	$	(52,317	)
Basic loss per share	$	(0.22	)	$	(1.75	)	$	(1.00	)	$	(2.49	)
Diluted loss per share	$	(0.22	)	$	(1.75	)	$	(1.00	)	$	(2.49	)

The operations of Livemocha have been integrated into the overall operations of the Company. The results of Livemocha are reported within the results of the Company’s operating segments and are not recorded on a stand-alone basis. Therefore it is impracticable to report revenue and earnings from Livemocha for the period ended September 30, 2013. The Company recorded revenue of $0.3 million and a net loss of $1.8 million from Lexia for the three and nine months ended September 30, 2013.