2. Acquisitions

legodo ag

On January 31, 2014, The Company acquired legodo ag, a privately held software company based in Karlsruhe, Germany. Legodo’s mission is to develop software for easy and rapid generation of personalized customer correspondence via any modern communication channel, including social media. Actuate acquired 100% of the outstanding shares held by legodo shareholders. At the time of the acquisition the Company paid $3.9 million in cash to legodo shareholders. This amount was net of $1.5 million in cash acquired. There is also $1.6 million in potential additional cash payments which may be required through December 2014. These additional payments are wholly dependent on the achievement of specific revenue contingencies. The initial estimated fair value of these performance-based payments of approximately $1.1 million was determined based on management’s estimate of fair value using a probability-weighted discounted cash flow model, which uses Level 3 inputs for fair value measurements. The fair value of the contingent consideration is remeasured on each reporting date, and changes to the fair value are recorded to acquisition related expenses on the consolidated statement of operations.

During the first nine months of 2014, we adjusted the estimated fair value of these performance-based payments due to a higher probability of meeting the legodo revenue contingencies. As a result, during the second and third quarter of 2014 we increased the fair value of these payments by approximately $240,000 and increased the liability from $1.1 million to approximately $1.3 million at September 30, 2014. These adjustments for the first nine months of 2014 totaling approximately $240,000 were recorded to acquisition related expenses under general and administrative section of our Condensed Consolidated Statement of Operations.

Under the purchase accounting method, the total purchase price was allocated to legodo’s net tangible and intangible assets based upon their estimated fair values as of January 31, 2014. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill.

Direct transaction costs related to the legodo acquisition totaling approximately $145,000 were incurred during the first quarter of 2014. These costs include legal and accounting fees, and other external costs directly related to the acquisition. These acquisition related costs were directly charged to general and administrative expense on the Condensed Consolidated Statements of Operations as incurred.

The table below represents the allocation of the purchase price to the acquired net assets of legodo based on their estimated fair values as of January 31, 2014 and the associated estimated useful life at that date.


	Amount (in thousands)			Useful life (in years)
Net tangible assets and liabilities	$	(2,555	)		N/A
Existing technology		2,722			7
Customer contracts and relationships		1,769			7
Goodwill		4,582			N/A

Total purchase consideration	$	6,518

As with acquisitions that the Company has undertaken in the past, the Company has initiated structural changes in its corporate structure in order to incorporate legodo. These changes in Company’s organizational structure are ongoing and could affect future estimates and assumptions.

Net tangible assets and liabilities:

legodo’s tangible assets and liabilities as of January 31, 2014 were adjusted to their estimated fair value as necessary. Among the net tangible assets assumed were approximately $1.5 million in cash and cash equivalents, $1.1 million in trade receivables, and $4.3 million in notes payable. The notes payable was paid in full by Actuate immediately following acquisition.

Identifiable intangible assets:

Existing technology—consists of legodo’s communication solutions which help maximize the capabilities of connecting to customers while being able to customize messages and platforms. legodo’s software suite helps its users to have more control over various customer communication channels, such as emails, letters, texting, Multimedia Messaging Service (MMS), and others. Its solution is also used in providing document generation and creation, quotations and contracts management, and digital processing solutions. The existing technology represents an intangible asset separate from goodwill. The existing technology was valued using a form of the income approach known as the excess earnings method. In the excess earnings method, value is estimated as the present value of the benefits anticipated from ownership of the subject intangible asset in excess of the returns required on the investment in the contributory assets necessary to realize those benefits. It is based on the theory that all operating assets contribute to the profitability of an enterprise. Therefore, if the estimated earnings associated with a specific asset of a company rely on the use of other company assets, then the estimated earnings of the subject asset must be reduced by appropriate charges for the use of these contributory assets.

Customer contracts and relationships— legodo primarily provides its software to German corporations. Typically, the Company works directly with customers by licensing its products and continued maintenance and consulting. These relationships represent an intangible asset separate from goodwill. Similar to the existing technology, the fair value of the customer contracts and relationships was established using the excess earnings method. Discussions with legodo management and review of the business operations indicated that the typical market participant interested in acquiring legodo would view the Company’s current customer relationships as an asset of central importance. An income approach was selected as the best method to capture the subject customers’ expected contribution to future earnings.

We expect to amortize the fair value of these intangible assets on a straight-line basis over their respective estimated useful life.

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 buyer-specific synergies that increase revenue and profits and are not otherwise available to a marketplace participant. No amount of goodwill is expected to be deductible for tax purposes.