Business Combinations

6 Months Ended

Jan. 31, 2013

Business Combinations [Abstract]

Business Combinations

10. Business Combinations

On November 28, 2012, the Company, through a wholly-owned subsidiary, completed the acquisition of the assets of the Retail Services Division of Fifty Below Sales & Marketing, Inc. (“50 Below”), a leading provider of eCommerce websites in the powersports, automotive tire and wheel aftermarket, medical equipment and pool and spa industries, for a purchase price of $5.0 million and the assumption of contracts having deferred revenue (ongoing service requirements for which ARI will not receive payment) valued in the amount of $4,642,000 pursuant to Sections 363 and 365 of the United States Bankruptcy Code. The Company did not assume any outstanding debtor-in-possession financing obligation; however, the Company agreed to: (a) cover claims held by certain employees against the estate of 50 Below, subject to a cap of $17,000; and (b) release any potential claim against 50 Below for alleged infringement of ARI’s intellectual property rights. 

The Company funded $1.5 million of the purchase price through a combination of the Company’s operating cash flows and availability under its existing Credit Facilities, including a $900,000 earnest money payment made on October 29, 2012.  The balance of the purchase price was funded through a Secured Non-Negotiable Subordinated Promissory Note dated as of the Closing Date (the “Note”) issued to Michael D. Sifen, Inc., an affiliate of an existing shareholder of the Company, in aggregate principal amount of $3.5 million. 

The following tables show the preliminary allocation of the purchase price (in thousands):

	Purchase
	Price
Cash	$	1,500
Financed by note payable		3,500
Assumed liabilities		4,642
Purchase Price	$	9,642
	Purchase
	Allocation
Prepaid expenses	$	9
Furniture and equipment		106
Developed technology		950
Tradenames		130
Customer Relationships		2,180
Goodwill		6,267
Purchase Price Allocation	$	9,642

Intangible assets include the fair value of tradenames with a useful life of 2 years and customer relationships with a useful life of 15 years.  Goodwill of $6.3 million represents the additional benefits provided to the Company by the acquisition of 50 Below through operational synergies.  The acquisition increases the Company’s portfolio of equipment dealer websites by 230% and is expected to accelerate ARI’s opportunity to drive organic growth through the cross‐selling of new products.  It also provides entry into new, high growth markets, including automotive aftermarket and durable medical equipment.  The combined customer benefits and operational efficiencies are expected to result in a stronger organization that can create more value for its customers, employees and shareholders than the sum of the stand‐alone business units.  The Company expects to recognize future tax benefits related to the 50 Below goodwill of approximately $2.5 million.  The Company’s results of operations for the three and six months ended January 31, 2013 include approximately $1.7 million of revenue and $771,000 of net loss before taxes related to 50 Below.

The following unaudited pro forma information for the six months ended January 31, 2013 reflects the historical results of both companies with pro forma adjustments as if the acquisition had occurred on August 1, 2012. The unaudited pro forma information for the six months ended January 31, 2012 reflects the historical results of operations of both companies, with pro forma adjustments as if the acquisition had occurred on August 1, 2011. The unaudited pro forma combined financial information does not reflect any cost savings, operating synergies, revenue enhancements or implementation costs that the combined company may achieve as a result of the acquisition.  The unaudited pro forma financial information presented is for information purposes only and does not purport to represent what the Company's and 50 Below's financial position or results of operations would have been had the acquisition in fact occurred on such date or at the beginning of the period indicated, nor does it project the Company's and 50 Below's financial position or results of operations for any future date or period.

	Six months ended January 31
	2013		2012
Revenue	$	16,622	$	15,138
Net income (loss)	$	250	$	(1,319)
Net income(loss) per common share:
Basic	$	0.03	$	(0.17)
Diluted	$	0.03	$	(0.16)

Pro forma adjustments to net income include amortization costs related to internally developed technology costs and intangible assets, acquisition-related professional fees, interest expense on the debt incurred to acquire the assets of 50 Below and the related debt discount, and the tax effect of the historical 50 Below results of operations and the pro forma adjustments at an estimated tax rate of 40% as follows:

	Six months ended January 31
	2013		2012
Amortization of internally developed technology	$	35	$	52
Amortization of intangible assets		67		100
Acquisition-related professional fees		(790)		-
Interest expense		172		259
Income tax benefit		(438)		(1,101)

On August 17, 2012, the Company acquired substantially all of the assets of Ready2Ride, Incorporated (“Ready2Ride”) pursuant to the terms of an Asset Purchase Agreement dated August 17, 2012.  Ready2Ride markets aftermarket fitment data to the powersports industry, which furthers ARI’s differentiated content strategy and expands ARI’s product offerings into aftermarket PG&A.

Consideration for the acquisition included $500,000 in cash, 100,000 shares of the Company’s common stock and assumed liabilities totaling approximately $419,000.  In addition, the Company will be required to pay (1) a contingent hold back purchase price not to exceed, in aggregate, $250,000 on or before August 17, 2013, contingent upon the occurrence of certain customer-related events as described in the Purchase Agreement; and (2) a contingent earn-out purchase price ranging from, in aggregate,$0 to $1,500,000, with estimated payments of $270,000, $266,000 and $266,000 based on estimated revenue on the first, second and third anniversaries of the closing of the acquisition The fair value of the contingent earn-out was calculated using the present value of future estimated revenue over the next three years, which is estimated at $500,000.  The following table shows changes in the estimated earnout payable for the six months ended January 31, 2013 (in thousands):

Beginning Balance	$	-
Fair value of earnout payable		500
Net payments		-
Imputed interest recognized		73
Ending Balance	$	573

The following table shows the balance of the estimated earnout payable at January 31, 2013 (in thousands):

Year Ending July 31,
2013	$	-
2014		270
2015		266
2016		267
Total Estimated Payments		803
Less imputed interest		(230)
Present value of Earnout	$	573

The following tables show the estimated fair value and the allocation of the purchase price (in thousands):

	Purchase
	Price
Cash- net	$	478
Assumed liabilities		419
Holdback		250
Earnout		500
Common Stock		101
Purchase Price	$	1,748
	Purchase
	Allocation
Accounts receivable	$	43
Furniture and equipment		12
Unearned revenue		(86)
Developed technology		366
Customer Relationships		880
Goodwill		533
Purchase Price Allocation	$	1,748

Intangible assets consist primarily of customer contracts and relationships with an estimated useful life of 16 years.  Goodwill consists of operating synergies, vendor relationships, new sales territories and industries.  The Company incurred legal fees of $55,000 for the three month period ended October 31, 2012 in connection with the Ready2Ride acquisition, which were included in general and administrative expense.  We have evaluated and determined that the Ready2Ride assets acquired as described above do not constitute a business that is “significant” as defined in the applicable SEC regulations.