Business Combination

6 Months Ended

Jun. 30, 2011

Business Combination [Abstract]

Business Combination

Note 7. Business Combination

On June 15, 2011, we signed an Asset Purchase Agreement (the “Acquisition”) to acquire certain assets and assume certain liabilities of SUPERAntiSpyware (“SAS”), a sole proprietorship located in Eugene, Oregon.  No stock was acquired as part of the transaction.  SAS provides software tools to detect and remove spyware, adware, rootkits, Trojans, worms, parasites, dialers, and other types of malware.   The acquisition increases the number and type of software products we provide to our customers, enables us to grow our direct business by marketing existing services to SAS software customers, and broadens the product suite we can offer to our channel partners.

We engaged an independent third party appraisal firm to assist in determining the fair value of assets acquired and liabilities assumed from the transaction.  Such a valuation requires management to make significant estimates, especially with respect to intangible assets.  These estimates are based on historical experience and information obtained from the management of the acquired company.  We placed value on SAS's technology, trade name and existing customer relationships, as well as non-compete agreements signed by certain key employees.  The purchase price for SAS exceeded the fair value of SAS net tangible and intangible assets acquired.  As a result, we have recorded goodwill in connection with this transaction.  This goodwill is deductible for tax purposes.

We paid a total of $8.5 million in cash including $1.0 million held in escrow against payment of a milestone-based earn-out.  The earn-out consists of four criteria-based milestones that must be met by specific dates over the next 18 months.  The probability-weighted fair value of the $1.0 million payment is $919,000.  As a result, we recorded the $81,000 difference between $1.0 million escrow cash payment and $919,000 fair value as Other Current Assets on our balance sheet.  The probability of milestone achievement will be re-measured quarterly and any changes in the estimated fair value will be recorded in statement of operations.

An allocation among the tangible and identifiable intangible assets and liabilities acquired, goodwill assumed and other assets is summarized below.  The financial information presented includes purchase accounting adjustments to the tangible and intangible assets:

	Amount  (in thousands)			Amortization  Period
Accounts receivable	$	5
Prepaid expenses		6
Accrued liabilities		(1	)
Deferred revenue		(491	)
Net liabilities assumed		(481	)
Identifiable intangible assets:
Technology		4,910		66 months
Trade/product name		310		66 months
Non-compete		160		72 months
Customer base		80		30 months
Goodwill		3,440
Total purchase consideration		8,419
Other current asset		81
Total cash consideration	$	8,500

The operating results of SAS have been included in our accompanying condensed consolidated statements of operations from June 16, 2011, the day following acquisition.  Pro-forma results of operations have not been presented because the acquisition was not material to our results of operations.  In addition to the $8.5 million cash consideration, we incurred acquisition-related expenditures of approximately $348,000, which were expensed in the period in which they were incurred in accordance with ASC 805.  These expenses were recorded in general and administrative expense.