4. Goodwill and Intangible Assets

 

On January 30, 2015, the Company, through its newly-formed, wholly-owned subsidiary, Control4 Australia Pty Ltd (“Control4 Australia”), completed the acquisition of Nexus Technologies Pty Ltd (“Nexus”), an Australia-based provider of audio/video distribution products (under the brand of “Leaf”), pursuant to a Share Sale Agreement dated January 30, 2015, by and among Control4 Australia and all of the shareholders of Nexus, under which Control4 Australia purchased all of the issued and outstanding shares of Nexus from its shareholders and Nexus became a wholly-owned subsidiary of Control4 Australia. The total consideration transferred was $8.5 million in cash. Of the cash consideration, $750,000 of cash was deposited in escrow as partial security for the indemnification obligations of the Nexus shareholders pursuant to the Share Sale Agreement, which will be released to the Nexus shareholders one year from the acquisition date, provided that there are no claims made against the escrow amount. Additionally, the Company incurred approximately $0.6 million in acquisition-related expenses accounted for in general and administrative expenses. The Company had previously sold select Leaf products to its North American dealer network. Through this acquisition, the Company believes it now offers a complete array of video distribution solutions under the Control4 brand to Control4 customers worldwide, will gain market share in the growing audio and video (A/V) category, and will leverage Leaf’s valuable engineering expertise to develop new and innovative A/V solutions.

 

The Company determined the Nexus acquisition was not a significant acquisition under Rule 3-05 of Regulation S-X.

 

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. Management estimated the fair values of tangible and intangible assets and liabilities in accordance with the applicable accounting guidance for business combinations. The preliminary allocation of consideration transferred is subject to potential adjustments to acquired deferred tax assets and liabilities as these tax estimates are pending the completion of tax returns for the acquired entity. These adjustments could have a material impact on the consolidated financial statements. The Company expects the allocation of the consideration transferred to be final within the measurement period (up to one year from the acquisition date). Due to new information obtained related to warranty and tax liabilities based on facts that existed at the acquisition date, the Company recorded measurement period adjustments to other assets acquired, goodwill, and other liabilities assumed. The net change to goodwill was an increase of $0.2 million. Had these adjustments been recorded as of the acquisition date, the Company’s cost of revenue would have decreased $0.1 million for the three months ended March 31, 2015, decreased $0.1 million for the three months ended June 30, 2015, and increased $0.2 million for the three months ended September 30, 2015, respectively. 

 

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

 

 

 

 

Amortizable Intangible Assets

 

The Company’s intangible assets and related accumulated amortization consisted of the following as of December 31, 2014 and September 30, 2015 (in thousands):

 

 

 

The weighted average amortization period for acquired technology, customer relationships and non-competition agreements is 4.8 years, 5.0 years, and 2.0 years, respectively; and 4.8 years for all amortizable intangible assets in total.

 

The Company recorded amortization expense during the respective periods for these intangible assets as follows: (in thousands):

 

 

 

Amortization of finite lived intangible assets as of September 30, 2015 for the next five years is as follows (in thousands):

 

 

 

Goodwill

 

Changes in the carrying amount of goodwill consisted of the following (in thousands):

 

 

 

Goodwill represents the excess of consideration transferred over the fair value of assets acquired and liabilities assumed and is attributable to assembled workforces as well as the benefits expected from combining the Company’s research and engineering operations with the acquired company’s. The Company’s goodwill associated with Nexus has tax basis but is not currently deductible for income tax purposes, due to Australian tax laws. The Company’s remaining goodwill does not have tax basis and, therefore, is not deductible for income tax purposes.