4. Acquisitions

 

Acquisition of Triad Holdings, Inc.

 

On February 27, 2017, the Company entered into a definitive agreement to acquire Triad Holdings, Inc., (“Triad Holdings”), along with its wholly owned subsidiary Triad Speakers, Inc. (“Triad Speakers” and together with Triad Holdings “Triad”) through the purchase of all the outstanding shares of common stock of Triad for a purchase price of $9.6  million (the “Triad Purchase Agreement”), which included cash acquired of $0.3 million. In accordance with the purchase agreement, $1.4 million of the purchase price will be held for up to 18 months from the acquisition date (the “Holdback”), to cover any of the sellers’ post-closing obligations, including without limitation any indemnification obligations that may arise. Due to customary net working capital adjustments, the purchase price of Triad was reduced to $9.2 million during the three months ended June 30, 2017, resulting in a reduction to the Holdback and goodwill. The Company has classified the remaining $1.1 million Holdback in other current liabilities.

 

Total consideration transferred for the Triad acquisition 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 amount of consideration transferred is subject to potential adjustments due to tax-related matters that could have a material impact on the condensed consolidated financial statements. Due to new information obtained related to net working capital and based on facts that existed at the acquisition date, the Company recorded measurement period adjustments to cash, goodwill, accounts payable and other liabilities. The Company expects the allocation of the consideration transferred to be final within the measurement period (up to one year from the acquisition date).

 

The following reflects the Company’s preliminary allocation of consideration transferred for the Triad acquisition (in thousands):

 

 

Identifiable Intangible Assets

 

The Company acquired intangible assets that consisted of customer relationships, trademarks/trade names, and developed technology, which had estimated fair values of $2.5 million, $2.4 million, and $1.4 million, respectively. The intangible assets were measured at fair value reflecting the highest and best use of nonfinancial assets in combination with other assets and liabilities. The customer relationships and trademarks/trade names were valued using an income approach that discounts expected future cash flows to present value. The estimated net cash flows were discounted using discount rates between 15% and 16%, based on the estimated internal rate of return for the acquisition and represent the rates that market participants might use to value the intangible assets based on the risk profile of the asset. The projected cash flows were determined using key assumptions such as: estimates of revenues and operating profits; capital expense investments; royalty rates; and tax savings. The acquired technology was valued using a cost savings approach that calculates the asset’s reproduction cost by estimating all the costs associated with creating the technology. The Company will amortize the intangible assets on a straight-line basis over their estimated useful lives of 10 years for the customer relationships, 12 years for the trademark/trade name, and 12 years for the developed technology. The amortization of these intangible assets is not deductible for income tax purposes.

 

Goodwill

 

Goodwill of $4.8 million represents the excess of consideration transferred over the fair value of assets acquired and liabilities assumed and is attributable to Triad’s assembled workforce, synergies and the projected profits from new products and dealers. This goodwill is not deductible for income tax purposes.

 

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

 

Australia Expansion

 

On April 1, 2016, the Company began working directly with home automation integrators in Australia to better serve and support customers in that country. As part of the shift from its distribution model in Australia, Control4, through its wholly owned subsidiary, Control4 Australia Holdings Pty., Ltd, acquired customer lists and inventory from the Company’s Australian distributor for $0.7 million.

 

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

 

Acquisition of Pakedge Device and Software Inc.

 

On January 29, 2016, the Company entered into a definitive agreement to acquire Pakedge Device and Software Inc. (“Pakedge”) through the purchase of all of the outstanding shares of common stock of Pakedge for a price of $33.0 million, which included cash acquired of $0.8 million. In accordance with the purchase agreement, $5.0 million was deposited in escrow and held until August 2017 to cover the sellers’ post-closing obligations.