Business Acquisition

12 Months Ended

Mar. 31, 2014

Business Acquisition

Business Acquisition

5. Business Acquisition

On January 17, 2013, the Company completed its acquisition of Storycode, Inc, a privately held mobile application publishing company. The acquisition was structured as a non-taxable transaction. Pursuant to the terms of the Agreement and Plan of Merger dated December 27, 2012, as amended (the “Merger Agreement”), Storycode became a wholly-owned subsidiary of the Company as of January 17, 2013.  The Company incorporated Storycode’s expertise in mobile application development, user experience, and design into its Postano social media visualization platform to create a new kind of social platform with unique mobile distribution capabilities and allow brands to use original and fan-generated content to develop engaging experiences across the worldwide web, live events, and mobile environment.

In accordance with the Merger Agreement, the Company issued an aggregate of 1,696,329 shares of its common stock with a fair value of approximately $3.3 million and may issue an additional 444,468 shares with a fair value as of the acquisition closing date of approximately $861,000, subject to an 18-month holdback for general indemnification purposes pursuant to the Merger Agreement, which holdback share number may be adjusted from time to time. The Company also substituted 822,320 options to purchase its common stock for options to purchase Storycode’s common stock of which value of approximately $949,000 was allocated to the purchase price as of the acquisition closing date. In addition, the Company made cash payments aggregating approximately $499,000. Total consideration to acquire Storycode was approximately $5.6 million and comprised of the following (in thousands):

Fair value of common stock issued at closing	$	3,285
Fair value of common stock issuable-subject to the 18-month holdback	861
Fair value of stock options assumed	949
Cash consideration paid	499
Total purchase price	$	5,594

The fair value of shares issued and issuable is based on the closing price of the Company’s common stock on the acquisition closing date of $2.28 per share. However, all of the shares issued or issuable are subject to a one-year lock up agreement that resulted in an adjustment to the estimated fair value of the common stock to $1.94 per share.  Cash consideration included a bridge loan from the Company to Storycode made during the quarter ended December 31, 2012 as well as legal and accounting fees incurred by Storycode and reimbursed by the Company. The Company incurred approximately $497,000 in direct transaction costs, of which approximately $288,000 was incurred and paid during the year ended March 31, 2013 and $209,000 was incurred and paid during the fiscal year ended March 31, 2014.

In connection with the acquisition, each Storycode stock option that was outstanding and unexercised as of the acquisition date was assumed and converted into an option to purchase TigerLogic common stock based on a conversion ratio of 0.43085. Based on Storycode’s stock options outstanding at January 17, 2013, the Company converted options to purchase 1,908,583 shares of Storycode common stock into options to purchase 822,320 shares of TigerLogic common stock. The estimated value of the assumed stock options included in the purchase price equals the fair value of the fully vested stock options assumed plus the fair value of the portion of the partially vested stock options assumed attributable to pre-combination services.

The portion of the estimated fair value of the partially vested replacement stock options that was considered unearned compensation as of the date of acquisition was approximately $393,000, which will be recognized as stock-based compensation expense on a straight line basis over the remaining vesting periods of the respective awards.

The fair value of the stock options was estimated using a Black-Scholes option-pricing model with the following weighted average assumptions:

	Options Assumed and Unearned
Volatility	60%-85%
Annual risk-free rate	0.09%-0.40%
Expected life (in years)	0.5-3.04
Dividend yield	0%

Purchase Price Allocation

The total purchase price was allocated to Storycode’s net tangible and intangible assets based upon their estimated fair values as of the acquisition date. The excess purchase price over the value of the net tangible liabilities and identifiable intangible assets was recorded as goodwill. The table below represents the allocation of the purchase price to the acquired net assets of Storycode based on their estimated fair values as of the acquisition date and the associated estimated useful lives at that date.

Allocation of purchase price (in thousands):

	Amount			Useful Life (years)
Identifiable intangible assets:
Trade and Domain Names	$	80		10
Technology	530			7
Goodwill	5,268			N/A
Net tangible liabilities	(284		)	N/A
Total estimated purchase price allocation	$	5,594

Identifiable intangible assets-Trade and domain names acquired primarily includes the Storycode brand name. Existing technology acquired primarily includes content management and publishing platform for mobile applications. The estimated fair value and useful lives of the trade and domain names and existing technology acquired was determined based the relief-from-royalty method, with key assumptions including: 1) forecasted revenue estimates for the trade and domain names were based on Storycode’s legacy business line revenue; 2) a royalty rate of 1.0%; and 3) a discount rate of 20.0%. The Company expects to amortize the fair value of these intangible assets on a straight-line basis over their respective estimated useful lives.

Goodwill-Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. The factors that contributed to the recognition of goodwill included securing certain synergies with existing technology of the Company that expect to increase revenue and profits of the Company, acquiring talented workforce, and cost savings opportunities.

Net tangible liabilities-Storycode’s tangible assets and liabilities as of January 17, 2013 were reviewed and adjusted to their fair value as necessary. Net tangible liabilities assumed included approximately $300,000 in accounts payable, $178,000 in other liabilities, $9,000 in cash, and $184,000 in accounts receivable.

Taxes-As part of the Company’s accounting for the acquisition of Storycode, a portion of the overall purchase price was allocated to goodwill and acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Approximately $0.6 million of net deferred tax assets was established as a result of the acquisition, which was offset by a full valuation allowance. Any impairment charge made in the future associated with goodwill will not be tax deductible and will result in an increased effective income tax rate in the quarter the impairment is recorded.

Pro Forma Results

Storycode’s results of operations are included in the Company’s historical results of operations for fiscal 2014 and part of fiscal 2013 from the acquisition date of January 17, 2013 through March 31, 2014 and were not significant. The following pro forma combined results of operations for the fiscal years 2013 and 2012 assumes the acquisition had taken place as of April 1, 2011, and combines the Company’s historical results of operations for the years ended March 31, 2013 and 2012, with Storycode’s unaudited historical results of operations for the years ended March 31, 2013 and 2012, respectively. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on April 1, 2011 or the results that may occur in the future. Acquisition related costs incurred during the year ended March 31, 2013 were not included in the pro forma information below.

	For the Years Ended March 31,
	2013			2012
	(In thousands, except per share data)
	(Unaudited)
Net revenue	$	4,767		$	5,074
Net loss	$	(4,181	)	$	(4,264	)
Net loss per basic and diluted share	$	(0.15	)	$	(0.15	)