9. Acquisition

 

On September 10, 2014, Control4 Corporation (“Control4”), through its wholly owned subsidiary, Control4 EMEA, LTD (“Control4 EMEA”), completed the acquisition of Extra Vegetables Limited, a company incorporated in England and Wales (“Extra Vegetables”), pursuant to a Stock Purchase Agreement dated August 28, 2014, by and among Control4 EMEA and all of the shareholders of Extra Vegetables (the “Purchase Agreement”). Extra Vegetables developed integration modules and third-party device drivers for Control4 and other third-party home automation systems.

 

Pursuant to the terms of the Purchase Agreement, Control4 EMEA purchased all of the issued and outstanding shares of Extra Vegetables from its shareholders (each a “Selling Shareholder,” and together, the “Selling Shareholders”) and Extra Vegetables became a wholly owned subsidiary of Control4 EMEA. Each Selling Shareholder also agreed to become an employee of Control4 EMEA or Control4. The total consideration transferred was $0.9 million in cash, which included a base purchase price of $0.7 million and $0.2 million as payment for Extra Vegetables’ net working capital.

 

Total consideration transferred was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values at the acquisition date as set forth below. While, from the acquisition date, the Extra Vegetables products will be provided without charge of a separate fee, the Company believes that the acquisition of Extra Vegetables will strengthen the Company’s interoperability development efforts for the connected home, accelerate the development and time-to-market for essential third-party device drivers, offer more comprehensive technical support, deliver better functionality, and provide more integration opportunities, while eliminating complexity for the Company’s dealers and distributors managing multiple vendors, licensing, and permission models. Management estimated the fair values of tangible and intangible asset and liabilities in accordance with the applicable accounting guidance for business combinations.

 

The Company’s allocation of consideration transferred for Extra Vegetables is as follows (in thousands):

 

 

Identifiable Intangible Assets

 

The Company acquired intangible assets that consisted of developed technology and non-compete agreements, which had estimated fair values of $574,000 and $22,000, respectively. The assets were measured at fair value reflecting the highest and best use of nonfinancial assets in combination with other assets and liabilities using an income approach that discounts expected future cash flows to present value. The estimated net cash flows were discounted using a discount rate of 22%, which is based on the estimated internal rate of return for the acquisition and represents the rate that market participants might use to value the intangible assets. The projected cash flows were determined using key assumptions such as: estimates of revenues and operating profits; the time and resources needed to recreate integration modules and drivers; the life of the product; and associated risks related to viability and product alternatives. The Company will amortize the intangible assets on a straight-line basis over their estimated useful lives of four years for developed technology and two years for non-competition agreements. These intangible assets are not deductible for income tax purposes.

 

Goodwill

 

Goodwill of $211,000 represents the excess of consideration transferred over the fair value of assets acquired and liabilities assumed and is attributable to Extra Vegetables’ assembled workforce as well as the benefits expected from combining the Company’s research and engineering operations with Extra Vegetables’. This goodwill is not deductible for income tax purposes.

 

Other

 

From the date of acquisition through December 31, 2014, the Company recorded revenue and net income associated with Extra Vegetables of approximately $17,500 and $21,900, respectively. Additionally, the Company incurred approximately $80,000 in total acquisition-related costs accounted for in general and administrative expenses.

 

Pro Forma Information

 

The unaudited pro forma information presented below includes the effects of the Extra Vegetables acquisition as if it had been consummated as of January 1, 2013, with adjustments to give effect to pro forma events that are directly attributable to the acquisition, including adjustments related to the amortization of acquired intangible assets. The unaudited pro forma information does not reflect any operating efficiency or potential cost savings, which may result from the consolidation of Extra Vegetables. Accordingly, the unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of what the actual results of the combined company would have been if the acquisition had occurred at the beginning of the period presented, nor is it indicative of the future results of operations. In fact, the Company plans to provide the Extra Vegetables products in Control4’s driver database and make them freely available to Control4 dealers through the Company’s installation software; therefore, the Company will not generate any direct, stand-alone product revenue from the Extra Vegetables technology in future periods.