Stamps.com 2014 Annual Report Download - page 74

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STAMPS.COM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill represents the excess of the fair value of consideration given over the fair value of the tangible assets, identifiable intangible assets and
liabilities assumed in a business combination and the potential synergy of combining the operations of Stamps.com and ShipStation. We expect
the entire amount of goodwill recorded in this acquisition will be deducted for tax purposes ratably over a 15 year period. The identified
intangible assets consist of trademarks, developed technology, non-
compete agreements and customer relationships. The estimated fair values of
the trademark and developed technology were determined using the “relief from royalty” method. The estimated fair value of the non-compete
was determined using the “with and without” method. The estimated fair value of customer relationship was determined using the “excess
earnings” method. The rate utilized to discount net cash flows to their present values was approximately 15% and was determined after
consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows.
Trademark, developed technology, non-compete and customer relationship will be amortized on a straight-line basis over their estimated useful
lives. We expect the amortization of acquired intangibles will be approximately $500,000 per quarter for the remaining estimated useful lives.
Under ASC 805, we are required to re-measure the fair value of the contingent consideration at each reporting period. The fair value of the
contingent consideration for the ShipStation acquisition was $25.0 million as of December 31, 2014, an increase of $8.8 million compared to the
$16.2 million as of June 30, 2014. The $8.8 million increase in fair value consisted of $8.4 million charge recorded in contingent consideration
charges and approximately $335,000 charge recorded in general and administrative compensation expense in operating expenses. As noted
above, the fair value of the contingent consideration is determined based on a probability weighted method, which incorporates management’s
forecasts of financial measures and the likelihood of the financial measure targets being achieved using a series of options that replicate the pay-
off structure of the earn-out, and the value of each of these options was determined using the Black-Scholes-Merton option pricing framework.
Increases or decreases in the fair value of the contingent consideration can result from changes in the assumed timing and amount of revenue and
expense estimates, changes in the probability of payment scenarios, changes in stock values, as well as changes in capital market conditions,
which impact the discount rate used in the fair valuation. Significant judgment is employed in determining the appropriateness of these
assumptions as of the acquisition date and for each subsequent reporting period.
ShipWorks Acquisition
On August 29, 2014, we acquired 100% of the outstanding equity of Interapptive Inc, which operates ShipWorks, in a cash transaction.
ShipWorks, based in St. Louis, Missouri, offers monthly subscription based e-commerce shipping software that provides simple, powerful and
easy to use solutions for online sellers. ShipWorks solutions integrate with over 50 popular online sales and marketplaces systems including
eBay, PayPal, Amazon, Yahoo! and others. ShipWorks offers multi-carrier shipping options and features including sending email notifications
to buyers, updating online order status, generating reports and many more. During the fourth quarter, we adjusted the purchase price of
ShipWorks by approximately $69,000.
We have accounted for the acquisition under the acquisition method of accounting in accordance ASC 805. The total purchase price for
ShipWorks was approximately $22.1 million and was comprised of the following (in thousands, except shares):
F-17
Table of Contents
Fair Value
Cash consideration
$
21,952
Deferred consideration
181
Total purchase price
$
22,133