Business Combinations, Goodwill and Intangibles

Acquisition of video conferencing business

On February 16, 2012, the Company completed the acquisition of the video conferencing business of Israel-based VCON Video Conferencing, Ltd. (“VCON”) through an asset purchase agreement. VCON was a pioneer in software based video conferencing solutions with product offerings that include group video conferencing endpoints, desktop video conferencing endpoints, video conferencing infrastructure solutions and software development kits. This acquisition and the combination of streaming and digital signage technologies will provide us with complementary technology opportunities allowing us to enter new growth markets.

Pursuant to the asset purchase agreement, the Company paid consideration of $4,632 in cash. The fair values of assets acquired and liabilities assumed are based on the information that was available during the measurement period of twelve months from the date of acquisition. The fair value of identified assets and liabilities acquired and goodwill is as follows:



Inventory	$	40
Property and equipment	34
Product warranty liability	(8		)
Proprietary software	2,247
Goodwill	2,319
	$	4,632

The goodwill of $2,319 is composed of expected synergies in utilizing VCON technology in ClearOne product offerings, reduction in future combined research and development expenses, and intangible assets including acquired workforce that do not qualify for separate recognition. This goodwill balance is not deductible for tax purposes.

Adjustments were made to the initial purchase price allocation and higher allocation to goodwill was made retroactive to the date of acquisition. The final fair value differed from the initial allocation as follows:



	Final Fair Value		Initial Allocation		Difference
Inventory	$	40	$	320	$	(280	)
Tradename	—		500		(500		)
Patents and technology	—		2,300		(2,300		)
Proprietary software	2,247		500		1,747
In-process research and development	—		200		(200		)
Goodwill	2,319		786		1,533

The decrease in purchase price allocation to intangible assets also resulted in a decrease in amortization charges retrospectively starting with the first quarter of 2012. The decrease in amortization charges in the three month periods ended March 31, June 30 and September 30, 2012, were $25, $75 and $75, respectively.

Unaudited Supplemental Pro Forma information


1)	Revenue and net loss from the video conferencing business from February 16, 2012 to December 31, 2012 were $1,319 and ($1,170), respectively.


2)	Revenue and earnings of the combined entity as though the business combination occurred as of January 1, 2011 were as follows:



	Year ended December 31,
	2012		2011
Revenue	$	46,630	$	47,583
Net income	26,603		6,046


3)	There were no material, nonrecurring pro forma adjustments directly attributable to the acquisition included in this supplemental Pro Forma information.

Acquisition of digital signage business

On September 6, 2011, the Company acquired substantially all the assets of MagicBox, Inc. through an asset purchase agreement.

MagicBox’s content management and control technology, along with its industry-leading database integration software complemented ClearOne's StreamNet systems. MagicBox had complementary products to ClearOne for a broad spectrum of applications. StreamNet technology delivers low-latency HD distribution over IP which to ClearOne fits well with MagicBox's content creation, scheduling, database integration and digital signage domain expertise.

Pursuant to the asset purchase agreement, the Company paid Magic Box, Inc. $980 in cash.

The fair value of identified assets and liabilities acquired and goodwill was as follows:



Accounts receivable	$	81
Inventory	117
Other current assets	12
Accrued expenses	(4		)
Property and equipment	9
Proprietary software	179
In-process research and development	159
Goodwill	427
	$	980

The goodwill of $427 is composed of expected synergies in utilizing MagicBox technology in ClearOne product offerings, reduction in future combined research and development expenses, and intangible assets including acquired workforce that do not qualify for separate recognition. The goodwill balance of $427 related to the MagicBox acquisition is deductible for tax purposes.

The Company incurred $327 and $167 towards acquisition related expenses, all of which are categorized under General and Administrative expenses in the Consolidated Statements of Operations for years ended December 31, 2012 and 2011, respectively.

Changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 are as follows:



	2012		2011
Balance as of January 1,
Goodwill	$	1,153	$	726
Accumulated impairment losses	—		—
	1,153		726
Goodwill acquired during the year	2,319		427
Balance as of December 31,
Goodwill	3,472		1,153
Accumulated impairment losses	—		—
	$	3,472	$	1,153

Intangible Assets

Intangible assets as of December 31, 2012 and 2011 consisted of the following:



	Estimated	As of December 31,
	useful lives	2012			2011
Tradename	7 years	$	435		$	435
Patents and technological know-how	10 years	2,070			2,070
Proprietary software	3 to 15 years	2,961			394
In-process research and development	Indefinite	159			559
Other	5 years	49			49
		5,674			3,507
Accumulated amortization		(1,416		)	(817		)
		$	4,258		$	2,690

During the years ended December 31, 2012 and 2011, amortization of these intangible assets were $679 and $393, respectively.

The estimated future amortization expense of intangible assets is as follows:



Years ending December 31,
2013	$	533
2014	528
2015	483
2016	446
2017	357
Thereafter	1,752
	$	4,099