Note 3. Intangible Assets

9 Months Ended

Sep. 30, 2013

Notes to Financial Statements

Intangible Assets

Acquisition of Precision IR Group, Inc.

     On August 22, 2013, the Company and PrecisionIR Group Inc., a Delaware corporation (“PrecisionIR” or “PIR”) entered into and consummated an Agreement and Plan of Merger (the “Acquisition Agreement”). Under the terms of the Acquisition Agreement, the Company paid $3,450,000 to certain debtors of PIR as full consideration to acquire all of the outstanding shares of PIR (the “Acquisition”). 
 

During the quarter ended September 30, 2013, the Company employed a third party valuation firm to assist in determining the assumptions for the preliminary purchase price allocation of assets and liabilities acquired from PIR as set forth in the tables below.  The income approach was used to determine the value of the PIR’s trademarks and client relationships. The income approach determines the fair value for the asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a rate of return that reflects the relative risk of achieving the cash flow and the time value of money. Projected cash flows for each asset considered multiple factors, including current revenue from existing customers; analysis of expected revenue and attrition trends; reasonable contract renewal assumptions from the perspective of a marketplace participant; expected profit margins giving consideration to marketplace synergies; and required returns to contributory assets. The cost approach was used to determine the value of PIR’s fixed assets, customer list, and software.  The cost approach is based on replacement cost as an indicator of value. It assumes that a prudent investor would pay no more for an asset than the amount for which it could be replaced new. Further, to the extent a particular asset provides less utility than a new one, its value will be less than its replacement cost new. To account for this difference, the replacement cost new is adjusted for losses in value, that is, depreciated.

The transaction resulted in recording intangible assets and goodwill at a fair value of $5,479,692 as follows:

Total Consideration	$	3,450,000
Plus:  Liabilities assumed in excess of tangible assets		2,029,692
Total fair value of PIR intangible assets and goodwill	$	5,479,692
Allocation of PIR intangible assets and goodwill:
Amortizable intangible assets	$	3,300,000
Trademarks		720,000
Goodwill		1,459,692
Total fair value of PIR intangible assets and goodwill	$	5,479,692

The tangible assets and liabilities acquired were as follows:

Cash	$	271,602
Accounts receivable		1,405,208
Prepaid expenses and other assets		366,876
Furniture, equipment, and improvements		297,076
Deposits		10,283
Total assets		2,351,045
Accounts payable and accrued expenses		(1,790,133	)
Deferred revenue		(1,452,780	)
Net tax liabilities		(1,137,824	)
Total liabilities		(4,380,737	)
Liabilities assumed in excess of tangible assets	$	2,029,692

The identifiable amortizable intangible assets created as a result of the acquisition will be amortized straight line over it’s estimated useful life as follows:

	Asset Amount		Useful Life (years)
Client relationships	$	1,480,000		7
Customer list		1,270,000		3
Software		550,000		3
	$	3,300,000

Select Pro-Forma Financial Information (Unaudited)

The following represents our unaudited condensed pro-forma financial results as if the Acquisition with PIR and the Company had occurred as of January 1, 2012. Unaudited condensed pro-forma results are based upon accounting estimates and judgments that we believe are reasonable. The condensed pro-forma results are not necessarily indicative of the actual results of our operations had the acquisitions occurred at the beginning of the periods presented, nor does it purport to represent the results of operations for future periods.

	Nine Months Ended
	September 30,
	2013			2012
Revenues		$	12,288,244		$	13,826,544
Net Income		$	839,595		$	738,101
Basic earnings per share		$	0.43		$	0.39
Diluted earnings per share		$	0.41		$	0.38

Acquisition of SEC Compliance Services

The Company acquired rights to all customer contracts of privately held SEC Compliance Services, Inc. (“SECCS”) on January 4, 2012.  The purchase price of $425,000 consisted of cash proceeds of $285,000 and 70,000 shares of common stock with a value of $140,000 based on the Company’s stock price of $2.00 per share on the close of business on January 4, 2012. The Company borrowed $275,000 from its line of credit to finance the transaction. The Company is amortizing the purchase price of $425,000 over its estimated useful life of five years.