| Acquisitions | Note 3 Acquisitions
2015 Acquisitions
Purchase of the business of Privax Ltd.
On May 5, 2015, the Company completed the acquisition of all
of the outstanding shares of Privax Ltd. (“Privax”), a
leading global provider of desktop and mobile privacy services for
consumers. The acquisition of Privax adds to the existing portfolio
of security software and services available to AVG’s customer
base. Supplemental pro forma information for Privax was not
material to AVG’s financial results and was therefore not
included. AVG incurred acquisition-related transaction costs of
$1,996 that were recorded in general and administrative expenses in
2015.
The following table summarizes the fair values of the net assets
acquired as of the acquisition date. The purchase price allocations
for these net assets are based on preliminary valuations and are
subject to change as the Company obtains additional information
during the acquisition measurement period:
Cash and cash equivalents $ 4,983
Trade accounts receivable, net 1,108
Property and equipment 341
Intangible assets 18,415
Other assets acquired 1,354
Deferred taxes (5,503 )
Other liabilities assumed (6,210 )
Goodwill (1) 47,138
Total purchase consideration $ 61,626
(1) The goodwill primarily represents the
Company’s expectation of synergies from the integration of
Privax products with the Company’s existing solutions and is
allocated to the Company’s Consumer segment. The balance of
goodwill is not expected to be deductible for tax purposes.
The following table reflects the estimated fair values and useful
lives of the acquired intangible assets identified during our
purchase accounting assessments:
Estimated fair values Useful lives
Trademarks $ 3,751 8
Developed technology 6,224 3
Customer relationships 8,440 2
Total intangible assets (2) $ 18,415
The acquisition date fair value of the consideration transferred
consisted of the following:
Components of consideration:
Cash consideration $ 35,874
Deferred consideration (3) 8,454
Contingent consideration (4) 17,298
Total purchase consideration $ 61,626
(2) Amortization for developed technology
is recognized in cost of revenue. Amortization for trademarks and
customer relationships is recognized in sales and marketing.
(3) Consists of $9 million cash held in
escrow, reported on the face of the consolidated balance sheets in
short-term restricted cash, and other adjustments, including final
working capital true-up.
(4) Reflects the acquisition date fair
value of the following additional cash consideration to be measured
and expected to be paid in the third quarter of 2016 upon the
achievement of the following:
a. Payout of $10 million upon
achievement of certain product and integration milestones; and
b. Payout of $10 million upon
achievement of certain performance-based targets relating to future
product sales.
Payouts for a. and b. respectively, are exclusive of one another
and, as of acquisition date, were expected to be fully achieved.
The contingent consideration was remeasured at December 31,
2015, including the updated expectation based on events after the
acquisition. The change in fair value is recognized in the income
statement and resulted in a $9.4 million gain.
Purchase of certain assets of Flayvr Media Ltd.
On October 6, 2015, the Company acquired certain assets of
Flayvr Media Ltd. in an asset purchase agreement designed to
consolidate its current presence in the mobile market. The
acquisition is accounted for as a business combination. The total
consideration of the purchase agreement consists of two components
to be paid in cash: (i) consideration of approximately $3
million, and (ii) earn-out payments for an amount up to $2.4
million that is dependent on achievement of certain performance
metrics, subsequent to the acquisition. Supplemental pro forma
information for Flayvr Media Ltd. was not material to AVG’s
financial results and was therefore not included. AVG incurred
acquisition-related transaction costs of $174 that were recorded in
general and administrative expenses in 2015.
The net assets acquired in the transaction were determined as
follows:
Other liabilities assumed $ (28 )
Intangible assets (1) 1,461
Goodwill (2) 2,443
Deferred taxes 185
Total purchase consideration $ 4,061
(1) Intangible assets consist of
developed technology, which is amortized over the estimated useful
life of 3 years.
(2) The goodwill resulted primarily from
the Company’s expectation of synergies from the integration
of Flayvr technology with the Company’s existing solutions
and is allocated to the Company’s Consumer segment. Goodwill
is not amortized and is not deductible for tax purposes.
Components of consideration:
Cash consideration paid $ 2,500
Deferred purchase consideration (3) 490
Contingent consideration (4) 1,071
$ 4,061
(3) The purchase consideration was
deferred for a period of 24 months after the acquisition date and
serves as a security for the indemnification obligations of the
selling shareholders.
(4) Reflects the acquisition date fair
value of the following additional cash consideration to be
remeasured at each reporting period and expected to be paid in the
last quarter of 2016, upon the achievement of the following:
a. Pay out of $400 upon achievement of
certain integration milestones; and
b. Pay out of $800 upon achievement of
certain performance-based targets relating to future product
sales.
Pay outs for a. and b. respectively, are exclusive of one another
and are currently expected to be fully achieved.
At the time of acquisition, the Company also entered into
employment agreements with certain employees of Flayvr Media Ltd.
The employee agreements included an incentive compensation
arrangement for these employees for up to a maximum of $1,100 of
payments contingent upon these employees providing continued
service to the Company and achieving certain technical milestones
over twenty-four months after the acquisition date. Such payments
are accounted for as compensation expense in the periods earned.
During the year ended December 31, 2015 the Company recorded
compensation expenses of $600 which were included in research and
development expenses.
2014 Acquisitions
Purchase of the business of Location Labs
On October 15, 2014, AVG Technologies USA Inc. (AVG USA)
partially acquired WaveMarket, Inc., doing business as Location
Labs, via a merger with a wholly owned subsidiary of AVG USA,
resulting in the Company indirectly holding 99.899% of the
ownership interest of the surviving entity, Location Labs Inc. The
holders of Class B shares of WaveMarket, Inc. owned the remaining
0.101% interest in the surviving entity post-merger. The results of
operations from the acquired business were included in the
Company’s consolidated statements of comprehensive income
from the date of acquisition. For the year ended December 31,
2015, the Company incurred acquisition-related transaction costs of
$15 (2014: $4,158), which were recorded in general and
administrative expenses.
Subsequent to the filing of our Annual Report on Form 20-F for the
year ended December 31, 2014 filed with the Securities and
Exchange Commission (the “SEC”) on April 10, 2015,
it was determined that the total purchase price for the purchase of
the business of Location Labs should have been $181,924, or $4,209
higher than initially concluded. While preparing the first
installment payment of the contingent consideration for the
acquisition, the Company noted that the cash settlement of the
awards cancelled in connection with the acquisition was to be
settled by an additional payment. This resulted in an increase in
the total purchase price, deferred purchase consideration and,
consequently, goodwill. The revised total purchase consideration
comprised:
Amount recorded Adjustments Revised amount
Cash consideration paid at closing of the merger $ 116,221 $
— $ 116,221
Deferred purchase consideration (1) 14,650 4,209 18,859
Repayment of Location Labs external borrowings (current and
non-current) 8,120
— 8,120
Location Labs transaction costs paid by AVG (2) 4,868
— 4,868
Contingent purchase consideration (3) 33,856
— 33,856
Total purchase consideration $ 177,715 $ 4,209 $ 181,924
(1) Per the terms of the agreement,
$17,500 was transferred into an escrow account to be disbursed over
15 months subsequent to the closing date and serves as security for
the indemnification obligations of the selling shareholders and
cash settlement of awards cancelled in connection with the merger.
At acquisition, the amount in escrow included $2,850 of
unrecognized compensation expense for future services. Accordingly,
the revised consideration of $18,859 was recorded as deferred
purchase consideration. As of December 31, 2014, $268 was
recorded as accrued compensation expense and $2,582 remained
unrecognized.
(2) Per the terms of the merger
agreement, the acquisition-related expenses incurred by Location
Labs were paid by the Company.
(3) Contingent consideration of up to
$36,000 is expected to be paid to the selling shareholders in two
installments within 24 months subsequent to the closing date,
subject to Location Labs achieving certain financial metrics. As of
December 31, 2015, $21,352 has been paid. The fair value is
based on the interest rate in effect upon closing of the merger, or
5.75%.
In conjunction with the acquisition agreements, certain employees
of Location Labs would receive payments of $2,850 in exchange for
their cancelled awards, contingent upon these employees providing
continued services to the Company. In the years ended
December 31, 2014 and 2015, $268 and $1,424 were recognized as
compensation expense. As of December 31, 2015, $1,158 remained
unrecognized.
The fair value of acquired intangibles was determined at the
acquisition date primarily using the income approach, which
discounts expected future cash flows to present values. The
discount rates used in the present value calculations are typically
derived from a weighted-average cost of capital analysis and then
adjusted to reflect the overall level of inherent risk. Upon
adjustment of the total purchase consideration, the revised
purchase price allocation is as follows:
Amount recorded Adjustments Revised amount
Cash and cash equivalents $ 10,384 $
— $ 10,384
Property and equipment 3,070
— 3,070
Identifiable intangible assets (4) 74,718
— 74,718
Other tangible assets acquired 8,425
— 8,425
Long-term liabilities, excluding Class B share redemption (950 )
— (950 )
Deferred taxes (net) (22,894 ) 494 (22,400 )
Other liabilities assumed (3,181 ) (513 ) (3,694 )
Total assets acquired and liabilities assumed 69,572 (19 ) 69,553
Class B share redemption (5) (39,498 )
— (39,498 )
Goodwill (6) 147,641 4,228 151,869
Total purchase consideration $ 177,715 $ 4,209 $ 181,924
(4) The estimated useful lives of the
identifiable assets and estimated fair values are follows:
Estimated Preliminary
(in years)
Patents 14 $ 268
Trademarks 10 1,666
Customer relationships 7 64,629
Technology 3 7,256
Non-compete agreement 2 899
$ 74,718
(5) In July 2014, Location Labs
authorized and issued 10,000 shares of Class B common stock to
certain employees of Location Labs, of which 6,000 shares were
designated as Class B-1 and 4,000 shares were designated as Class
B-2. Class B-1 and B-2 shares have certain put and call redemption
rights upon a change of control event, including the
Company’s acquisition of Location Labs in October 2014. Class
B-1 shares are puttable to the Company by the shareholders for a
three month period commencing on the first anniversary of the
change in control for a maximum nominal value of $25,200. If the
put option remains unexercised, three months after the put right
expires the B-1 shares can be called by the Company for a three
month period at the same redemption value as the put right. In
October 2015, the Company redeemed the Class B-1 shares for
$25,200. Class B-2 shares are puttable to the Company by the
shareholders for a six month period commencing on January 1,
2016 for a maximum nominal value of $16,800. If the put option
remains unexercised, three months after the put right expires the
B-2 shares can be called by the Company for a three month period at
the same redemption value as the put right. The redemption value is
based upon the assumed achievement of certain financial metrics of
Location Labs in 2014 and 2015. All other rights between the Class
B-1 and B-2 shares were consistent. As described in Note 20, this
redeemable non-controlling interest is classified outside of
permanent equity.
(6)
Goodwill is calculated as the difference between the
estimated fair value of the consideration transferred and the
estimated fair values of the assets acquired, liabilities assumed
and non-controlling interest in the acquiree. The goodwill resulted
primarily from the Company’s expectation of synergies from
the integration of Location Labs software with the Company’s
existing solutions and is allocated to the Company’s Consumer
segment. Goodwill is not amortized and is not deductible for tax
purposes.
Pro forma effect of Location Labs acquisition
The following unaudited pro forma financial information presents
the Company’s combined results with Location Labs as if the
acquisition had occurred at the beginning of 2013. No effect has
been given to cost reductions or synergies in this presentation. In
management’s opinion, the unaudited pro forma combined net
revenue and net income are not necessarily indicative of the actual
results that would have occurred had the acquisition been
consummated at the beginning of 2013, nor are they necessarily
indicative of the future results of the combined companies.
Year ended December 31,
2013 2014
Pro forma net revenue $ 434,470 $ 401,376
Pro forma net income $ 50,935 $ 6,347
The amounts of net revenue and net income of Location Labs included
in the Company’s consolidated statement of comprehensive
income from the acquisition date to December 31, 2014 were
$9,404 and $577, respectively.
Employee share-based compensation costs recognized by Location Labs
of $39,565 are included in the supplemental pro forma net income
for the year ended December 31, 2014, which related to equity
awards granted in anticipation of an acquisition and are
non-recurring. There is no other material, non-recurring pro forma
adjustment included in pro forma revenue and net income.
Year ended
2013 2014
Historical net income of Location Labs prior to merger $ 3,610 $ (46,019 )
Eliminate historical amortization of capitalized software 2,712 3,614
Amortization on intangible assets acquired (1) (12,287 ) (9,727 )
Acquisition related costs (2) (9,026 ) 9,026
Net adjustment to operating income (18,601 ) 2,913
Eliminate historical Location Labs interest expense (3) 1,010 752
Interest expense on the new credit facility (4) (8,253 ) (6,534 )
Amortization of deferred debt issuance costs related to the new
credit facility (5) (589 ) (466 )
Net adjustment to Other income and expense, net (7,832 ) (6,248 )
Net adjustment to income tax (provision) benefit 10,044 1,267
Net adjustment to Net income $ (12,779 ) $ (48,087 )
(1) For the purpose of the pro forma
income statements, amortization has been calculated straight-line
over the estimated useful lives of the intangible assets recognized
on acquisition.
(2) The supplemental pro forma net income
for the year ended December 31, 2014 was adjusted to exclude
costs of the merger incurred by the acquirer and acquiree of $9,026
and included in the supplemental pro forma net income for the year
ended December 31, 2013.
(3) In accordance with the acquisition
agreement, the Company fully repaid the external borrowings of
Location Labs. Had the acquisition been consummated at the
beginning of 2013, the external borrowings would have been repaid
at the beginning of the year and there would have been no interest
expense.
(4) The interest rates used for pro forma
purposes are based on the rates to be in effect upon the closing of
the merger. The interest rate on the terms loans under the new
credit facility is 5.75% (based on an adjusted LIBOR rate plus a
margin of 4.75% with a LIBOR floor of 1.00%).
(5) Reflects amortization expense with
respect to an assumed aggregate debt issuance costs of $3,528 under
the new credit facility. This expense has been calculated using the
effective interest rate method.
Purchase of the business of Norman Safeground AS
In a transaction to expand its security products portfolio,
especially in the SMB market, on October 31, 2014, the Company
acquired 100% of the outstanding shares of Norman Safeground AS
(Norman). The results of operations from the acquired business were
included in the Company’s consolidated statements of
comprehensive income from the date of acquisition. Supplemental pro
forma information for Norman was not material to the
Company’s financial results and was therefore not included.
In 2014, the Company incurred acquisition-related transaction costs
of $436 and in 2015 the Company incurred acquisition-related
transaction costs of $136 which were recorded in general and
administrative expenses.
The total purchase price of $16,909 consisted of cash
consideration. In 2015, the Company adjusted the opening balances
for deferred taxes related to the deferred revenues acquired and
recorded reporting period adjustments. The allocation of purchase
price of the assets acquired and liabilities assumed based on their
revised fair values is as follows:
Provisional Adjustments Revised amount
Net assets, excluding intangible assets (1) $ (2,553 ) $
— $ (2,553 )
Intangible assets (2) 7,262
— 7,262
Deferred tax liabilities, net (1,025 ) (570 ) (1,595 )
Goodwill (3) 12,925 570 13,495
Total purchase consideration $ 16,609 $
— $ 16,609
(1) Net assets included property and
equipment of $142, and net deficit of $6,104. The cash acquired in
the transaction totaled $3,709.
(2) Intangible assets included software
of $25, trademarks of $572, customer relationships $5,802, and
technology $863, which are amortized over their estimated useful
lives of 3 to 7 years.
(3) The goodwill resulted primarily from
the Company’s expectation of synergies from the integration
of Norman technology with the Company’s existing solutions
and is allocated to the Company’s SMB segment. Goodwill is
not amortized and is not deductible for tax purposes.
Purchase of the business of Winco Capital
Participações LTDA
In a transaction to consolidate its current presence in the
Brazilian Consumer and SMB market, on October 15, 2014, the
Company acquired 100% of the shares of Winco Capital
Participações LTDA., and entered into an asset purchase
agreement with certain parties to purchase certain assets of Winco
Tecnologia e Sistemas LTDA and Winco Sistemas LTDA. Subsequently,
the Company renamed Winco Capital Participações LTDA. to
“AVG Distribuidora de Tecnologias do Brasil Ltda.” (AVG
Brasil).
The results of operations from the acquired business were included
in the Company’s consolidated statements of comprehensive
income from the date of acquisition. Supplemental pro forma
information for AVG Brasil was not material to the Company’s
financial results and therefore has not been disclosed. For the
year ended December 31, 2014, the Company incurred
acquisition-related transaction costs of $246, which were recorded
in general and administrative expenses.
The net assets acquired in the transaction were determined as
follows:
Net assets, excluding intangible assets (1) $ (47 )
Intangible assets (2) 1,041
Goodwill (3) 2,211
Total purchase consideration $ 3,205
(1) Net assets included property and
equipment of $33, and net deficit of $84. The cash acquired in the
transaction totaled $4.
(2) Intangible assets included a customer
database of $70, a non-compete agreement of $524, and customer
relationships of $447 which are being amortized over their
estimated useful lives of 2 years respectively.
(3) The goodwill resulted primarily from
the Company’s expectation of synergies from the integration
of Winco technology with the Company’s existing solutions and
is allocated to the Company’s Consumer segment. Goodwill is
not amortized and is not deductible for tax purposes.
Components of consideration:
Cash consideration paid $ 1,332
Deferred purchase consideration (4) 1,873
$ 3,205
(4) The purchase consideration was
deferred for a period of 24 months after the acquisition date and
serves as a security for the indemnification obligations of the
selling shareholders.
2013 Acquisitions
Purchase of the business of Angle Labs
On January 28, 2013, AVG Netherlands B.V. and OpenInstall,
Inc. acquired the assets and liabilities of Angle Labs, a mobile
application developer based in the United States. The results of
operations from the acquired Angle Labs business were included in
the consolidated statements of comprehensive income from the date
of acquisition. Supplemental pro forma information for Angle Labs
is not material to the Company’s financial results and
therefore is not included. The Company incurred acquisition-related
transaction costs of $55 and nil for the years ended
December 31, 2013 and 2014, respectively, which were recorded
in general and administrative expenses.
The net assets acquired in the transaction were determined as
follows:
Net assets, excluding intangible assets $ 50
Intangible assets (1) 3,170
Goodwill
—
Total purchase consideration $ 3,220
(1) Intangible assets included developed
technology of $3,170, which is amortized over its estimated useful
life of three years.
Components of consideration:
Cash consideration paid $ 2,865
Deferred purchase consideration (2) 355
$ 3,220
(2) The purchase consideration was
deferred for a period of 24 months after the acquisition date and
serves as a security for the indemnification obligations of the
selling shareholders.
At the time of acquisition, the Company also entered into
employment agreement with an employee of Angle Labs. The employment
agreement included an incentive compensation arrangement for this
employee for up to a maximum of $350 of payments contingent upon
this employee providing continued service to the Company for twelve
months after the acquisition date. Such payments are accounted for
as compensation expense in the periods earned. During the year
ended December 31, 2013, the Company recorded compensation
expense of $350, which was included in research and development
expenses.
Purchase of the business of PrivacyChoice LLC
On May 14, 2013, AVG Netherlands B.V. acquired certain assets
and liabilities from PrivacyChoice LLC
(“PrivacyChoice”), a technology company based in the
United States that has developed and provides privacy-related
online services used by consumers and businesses. The results of
operations from the acquired business were included in the
consolidated statements of comprehensive income from the date of
acquisition. Supplemental pro forma information for PrivacyChoice
was not material to the Company’s financial results and was
therefore not included. The Company incurred acquisition-related
transaction costs of $66 and nil for the years ended
December 31, 2013 and 2014, respectively, which were recorded
in general and administrative expenses.
The net assets acquired in the transaction were determined as
follows:
Intangible assets (1) $ 3,480
Goodwill (2) 360
Total purchase consideration $ 3,840
(1) Intangible assets included developed
technology of $1,380 and a non-compete agreement of $2,100, which
are amortized over their estimated useful lives of five and three
years respectively.
(2) The goodwill resulted primarily from
the Company’s expectation of synergies from the integration
of PrivacyChoice technology with the Company’s existing
solutions. Goodwill is not amortized and is not deductible for tax
purposes.
Components of consideration:
Cash consideration paid $ 3,200
Deferred purchase consideration (3) 640
$ 3,840
(3) The purchase consideration was
deferred for the period of 18 months after the acquisition date and
serves as a security for the indemnification obligations of the
selling shareholders.
At the time of acquisition, the Company also entered into
employment agreements with certain employees of PrivacyChoice. The
employee agreements included an incentive compensation arrangement
for these employees for up to a maximum of $2,560 of payments
contingent upon these employees providing continued service to the
Company and achieving certain technical milestones within twelve
months after the acquisition date. Such payments are accounted for
as compensation expense in the periods earned. During the years
ended December 31, 2013 and 2014, respectively, the Company
recorded compensation expenses of $1,600 and $960, respectively,
which were included in research and development expenses.
Purchase of the business of LPI Level Platforms
Inc.
On June 28, 2013, AVG Netherlands B.V. and AVG Technologies
Canada Inc. acquired certain assets and liabilities from LPI Level
Platforms Inc. (“LPI”), a remote monitoring and
management software company based in Canada. The results of
operations of the acquired LPI business were included in the
consolidated statements of comprehensive income from the date of
acquisition. Supplemental pro forma information for LPI is not
material to the Company’s financial results and therefore is
not included. The Company incurred acquisition-related transaction
costs of $302 and nil, for the years ended December 31, 2013
and 2014 respectively, which were recorded in general and
administrative expenses.
The net assets acquired in the transaction were determined as
follows:
Net assets, excluding intangible assets (1) $ 1,001
Intangible assets (2) 19,310
Goodwill (3) 3,513
Deferred tax liability (406 )
Total purchase consideration $ 23,418
(1) Net assets included property and
equipment of $210, and net deficit of $134. The cash acquired in
the transaction totaled $925.
(2) Intangible assets included developed
technology of $8,560 and customer relationships of $10,750, which
are amortized over their estimated useful lives of five years.
(3) The goodwill resulted primarily from
the Company’s expectation of synergies from the integration
of LPI’s technology with the Company’s existing
solutions and LPI’s workforce. Goodwill is not amortized and
is not deductible for tax purposes.
Components of consideration:
Cash consideration paid $ 20,130
Deferred purchase consideration (3) 3,288
$ 23,418
(3) The purchase consideration was
deferred for the period of 18 months after the acquisition date and
serves as a security for the indemnification obligations of the
selling shareholders.
Purchase of the business of ASR Technologies AB
On September 2, 2013, AVG Netherlands B.V. acquired certain
assets from Swedish company ASR Technologies AB, Alma
Orucevic-Alagic and Amir Alagic (collectively “ASR”).
The results of operations of the acquired ASR business were
included in the consolidated statements of comprehensive income
from the date of acquisition. Supplemental pro forma information
for ASR is not material to the Company’s financial results
and therefore is not included. The Company incurred
acquisition-related transaction costs of $45 and nil, for the years
ended December 31, 2013 and 2014, respectively, which were
recorded in general and administrative expenses.
The net assets acquired in the transaction were provisionally
determined as follows:
Intangible assets (1) $ 2,341
Goodwill
—
Total purchase consideration $ 2,341
(1) Intangible assets included developed
technology of $2,341 amortized over its estimated useful life of
three years.
Components of consideration:
Cash consideration paid $ 1,491
Deferred purchase consideration (2) 850
$ 2,341
(2) The purchase consideration was
deferred for the period of 24 months after the acquisition date and
serves as a partial remedy for the indemnification
obligations.
At the time of acquisition, the Company also engaged ASR to
complete certain technical milestones. The acquisition agreement
included an incentive compensation arrangement for ASR for up to a
maximum of $459 of payments contingent upon achieving these
technical milestones within nine months after the acquisition date.
Such payments are accounted for as compensation expense in the
periods earned. During the years ended December 31, 2013 and
2014, respectively, the Company recorded incentive compensation
expenses of $204 and $255, respectively, which were included in
research and development expenses. |
