Business Combinations

3 Months Ended

Jan. 31, 2014

Business Combinations [Abstract]

Business Combinations

4. Business Combinations

On November 1, 2013, the Company acquired substantially all of the assets of DUO Web Solutions (“DUO”) pursuant to an Asset Purchase Agreement dated November 1, 2013.  DUO was a leading provider of social media and online marketing services for the powersports industry, which is in line with the Company’s strategy to grow the digital marketing services side of the business.The Company determined that the DUO assets acquired did not constitute a business that is “significant” as defined in the applicable SEC regulations, nor did it have a material impact on the Company’s financial statements.

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, ATW and HME industries for a purchase price of $5,000,000 and the assumption of contracts having deferred revenue (ongoing service requirements for which ARI will not receive payment) valued in the amount of $4,601,000.

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

	Purchase
	Price
Cash	$	1,500
Financed by note payable		3,500
Assumed liabilities		4,601
Purchase Price	$	9,601
	Purchase
	Allocation
Prepaid expenses	$	9
Furniture and equipment		106
Developed technology		950
Tradenames		130
Customer Relationships		2,180
Goodwill		6,226
Purchase Price Allocation	$	9,601

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 $6,226,000 represents the additional benefits provided to the Company by the acquisition of 50 Below through operational synergies.  The acquisition increased 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 provided entry into new, potentially high growth markets, including ATW and DME.  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 acquired approximately $7 millionof tax deductible goodwill related to the 50 Below acquisition. 

The following unaudited results of operation for the three and six months ended January 31, 2014 reflect actual results of the Company, which include the results of the 50 Below operation for the entire period. The unaudited pro forma information for the three and six months ended January 31, 2013 reflects the historical results of operations of both companies, with pro forma adjustments as if the acquisition had occurred on August 1, 2012. The unaudited pro forma combined financial information does not reflect any cost savings, operating synergies, revenue enhancements or implementation costs that the combined company has achieved 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.

	Three months ended January 31				Six months ended January 31
	2014		2013		2014		2013
Revenue	$	8,135	$	8,279	$	16,295	$	16,622
Net income (loss)	$	(461)	$	630	$	(436)	$	250
Net income (loss) per common share:
Basic	$	(0.03)	$	0.07	$	(0.03)	$	0.03
Diluted	$	(0.03)	$	0.07	$	(0.03)	$	0.03

Pro forma adjustments to net income include amortization costs related to internally developed technology 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:

	Three months ended January 31				Six months ended January 31
	2014		2013		2014		2013
Amortization of internally developed    technology	$	-	$	9	$	-	$	35
Amortization of intangible assets		-		17		-		67
Acquisition-related professional fees		-		(790)		-		(790)
Interest expense		-		43		-		172
Income tax benefit		-		(110)		-		(438)

On August 17, 2012, the Company acquired substantially all of the assets of Ready2Ride, Incorporated (“Ready2Ride”) pursuant to an Asset Purchase Agreement dated August 17, 2012.  Ready2Ride was a marketer of 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, assumed liabilities totaling approximately $419,000,  a contingent hold-back purchase price of up to  $250,000and a contingent earn-out purchase price ranging from, in aggregate,$0 to $1,500,000.

On October 22, 2013, the Company amended the Asset Purchase Agreement in relation to the earn-out payments as follows: (i) the first earn-out payment is composed of $125,000paid in October 2013 and 10,000 shares of common stock issued in November 2013; (ii) the second earn-out payment is composed of $125,000 and 15,000 shares of common stock payable in September 2014; and (iii) the third earn-out payment is composed of  $125,000 and 15,000 shares of common stock payable in September 2015. 

The contingent earn-out payable was initially measured at fair value on a recurring basis calculated using the present value of future estimated revenue over the next three years, which was originally estimated at $500,000.  Prior to the amendment, because the contingent earn-out payable had no comparable market data or significant observable inputs to determine fair value, it was classified as a Level 3 measurement.  Because the amended Asset Purchase Agreement defines the future payments based on cash and Company stock actively traded, and the payments are no longer contingent on future events, the earn-out is now classified as a Level 1 fair value measurement.  Unrealized gains and losses for changes in fair value are recognized in earnings.

The following table shows changes in the estimated holdback and earn-out payable (in thousands):

	Three months ended January 31				Six months ended January 31
	2014		2013		2014		2013
Beginning balance	$	469	$	749	$	721	$	-
Original fair value of holdback and earn-out payable		-		-		-		749
Payments made		(33)		-		(283)		-
Imputed interest recognized		19		76		43		76
Gain on change in fair market value		-		-		(26)		-
Ending Balance	$	455	$	825	$	455	$	825

The balance of the holdback and the earn-out payable includes $286,000 and $303,000 in current portion of earn-out payable and $169,000and $418,000inlong-term portion of earn-out payable on the unaudited balance sheet at January 31, 2014 and July 31, 2013, respectively, with estimated payments as follows (in thousands):

	Holdback and
	Earn-out
Year Ending July 31,	Payable
2014	$	-
2015		315
2016		190
Total estimated payments		505
Less imputed interest		(50)
Present value of holdback and earn-out payable	$	455

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
	Price
	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 determined that the Ready2Ride assets acquired as described above did not constitute a business that is “significant” as defined in the applicable SEC regulations.

The results of operations related to the 50 Below, Ready2Ride and DUO acquisitions since the date of acquisition are included in the consolidated statements of income for the periods presented.  It is impracticable to segregate this information as the acquired businesses have been integrated into the operations of ARI and are no longer readily identifiable.