Note 3: Acquisition

On August 15, 2014, the Company acquired substantially all the assets and assumed the liabilities of SharpSpring LLC, a Delaware limited liability company for a cash payment of $5,000,000 plus potential earn out consideration of $10,000,000 that is contingent on the SharpSpring LLC product achieving certain levels of revenue in 2015. The earn out consideration, if met, will be paid 60% in cash and 40% in stock in following the audit of the 2015 financial statements. The acquired assets and liabilities were assigned to SMTP's wholly owned subsidiary SharpSpring. Inc. (“SharpSpring”), SharpSpring is a cloud-based marketing automation platform that enables users to connect with customers and build relationships to drive revenue through marketing automation, call tracking and customer relationship management..

The following table presents the components of the initial purchase price consideration:

Cash consideration	$	5,000,000
Earn out liability		6,963,000
Liabilities assumed		149,841
Total purchase price	$	12,112,841

The initial allocation of the purchase price is based on management estimates and assumptions, and other information compiled by management, which utilized established valuation techniques appropriate for the industry; these techniques were the income approach, cost approach or market approach, depending upon which was the most appropriate based on the nature and reliability of the data available. These amounts are provisional and subject to finalization in the next accounting period. The income approach is predicated upon the value of the future cash flows that an asset is expected to generate over its economic life. The cost approach takes into account the cost to replace (or reproduce) the asset and the effects on the assets value of physical, functional and/or economic obsolescence that has occurred with respect to the asset. The market approach is a technique used to estimate value from an analysis of actual transactions or offerings for economically comparable assets available as of the valuation date.

The following represents the initial allocation of the purchase price to the acquired net tangible and intangible assets acquired and liabilities assumed of SharpSpring. These amounts are provisional and subject to finalization in future accounting periods.

Total purchase price	$	12,112,841
Less:
Net tangible assets acquired		(135,614	)
Intangible assets acquired:
Trade name		(120,000	)
Developed technologies		(2,130,000	)
Customer relationships		(1,320,000	)
Total intangible assets		(3,570,000	)
Goodwill	$	8,407,227

Acquired intangible assets include trade names which are to be amortized over the useful life of five years, and technology and customer relationships which are to be amortized over the useful life of 11 years.

Goodwill of $8,407,227 was recorded. Goodwill will not be amortized but instead tested for impairment at least annually (more frequently if certain indicators are present). The $8,407,227of goodwill as of September 30, 2014 is not expected to be deductible for tax purposes. Goodwill arose primarily as a result of the expected future growth of the SharpSpring product and the assembled workforce.

Pursuant to the Asset Purchase Agreement, the Company is liable for an earn out of up to $10,000,000, payable 60% in cash and 40% in stock, depending on SharpSpring achieving certain revenue levels in 2015. The Company utilized the income approach to estimate the fair value of the earn out. The Company analyzed scenarios and determined a probability weighting for each scenario. The Company calculated the earn out payments based on the respective revenues for each scenario and then weighted the resulting payment by the probabilities of achieving each scenario. In order to calculate an appropriate risk-adjusted discount rate for the earn out, the Company calculated the weighted average cash-flows of the business based on the three scenarios and their respective weightings. The Company then calculated an implied internal rate of return (“IRR”) of 18.9%, which is the discount rate necessary in order to reconcile the weighed cash-flows of the three scenarios to the total purchase price including the earn out payment. The earn out payment was then discounted by the 18.9% IRR. Based on these methods and the Company's assessment of meeting those revenue levels in 2015, an earn out liability of $6,963,000was recorded as a liability during purchase accounting. The company will continue to refine the projection of SharpSpring revenue levels in 2015 compared to the earn out revenue levels and adjust the liability accordingly through the consolidated statement of operations.

The acquisition was accounted for as a business purchase pursuant to Accounting Standard Codification (“ASC”) Topic 805, Business Combinations. Under this ASC, acquisition and integration costs are not included as components of consideration transferred, but are accounted for as expenses in the period in which the costs are incurred.

The initial purchase price allocation is subject to change as the Company finalizes its determination relating to the valuation of net assets acquired from SharpSpring. Accordingly, future adjustments may impact the initial amount of goodwill represented in the table above.

The following table summarizes selected unaudited pro forma consolidated statements of operations data for the nine months ended September 30, 2014 as if the acquisition had been completed at the beginning of the year.

	Nine Months Ended
	September 30, 2014
Net revenues	$	4,910,008
Operating income (loss)	$	354,308

This selected unaudited pro forma consolidated financial data is included only for the purpose of illustration and does not necessarily indicate what the operating results would have been if the acquisition had been completed on that date. Moreover, this information does not indicate what the Company's future operating results will be. This information includes actual data in 2014 for the period subsequent to the date of the acquisition. The consolidated statement of operations for the nine months ended September 30, 2014 include net revenue and net loss of $159,784 and $84,721 , respectively, attributable to SharpSpring since the acquisition.