Acquisitions

9 Months Ended

Sep. 30, 2019

3. Acquisitions

Elauwit Networks, LLC

On August 1, 2018, we acquired the assets of Elauwit Networks, LLC (“Elauwit”) for $28,000 plus other contingent consideration. Elauwit provides data and video services to multi-unit dwelling properties including student housing, condominiums, apartments, senior living, and hospitality industries throughout the U.S. In addition, Elauwit builds and maintains the network that supports these services for property owners and managers and provides support for residents and employees.

The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. As such, the assets acquired and liabilities assumed are recorded at their acquisition-date fair values. The total purchase price was $28,612, which includes contingent consideration fair valued at $961. At the closing date, we paid cash of $15,576. $13,000 of the purchase price was held back for the following: (i) $11,000 held back for third-party consents not obtained at closing for certain customer agreements, which are released as Elauwit delivers third-party consents with respect to such customer agreements; and (ii) a $2,000 indemnification holdback that is being retained for a period of 12 months following the closing of the acquisition. In 2018, we paid $9,048 of the amounts held back for third-party consents. We paid the remaining $1,952 for amounts held back for third-party consents in January 2019. During the nine months ended September 30, 2019, we paid $1,075 of the indemnification holdback consideration with the remaining $925 retained by the Company for settlement of working capital deficit and other indemnification matters discussed further below. Of the $925 retained by the Company, $566 related to undisclosed liabilities associated with acquired contracts that were initially recorded as network costs in the condensed consolidated statement of operations in the period in which the costs were incurred instead of recognizing a reduction in the indemnification liability and establishing an unfavorable contract liability. Accordingly, during the three months ended September 30, 2019 an out-of-period adjustment was recognized that reduced cost of sales by $566 to correct for costs associated with these unfavorable contracts that were recorded in the prior periods.

The contingent consideration could require payments in the aggregate amount of up to $15,000 that would be due and payable subject to certain conditions and the successful achievement of annual revenue targets for the acquired business during the 2019 and 2020 fiscal years. Refer to Note 12 for further discussion. The contingent consideration is subject to acceleration under certain corporate events. The fair value of the contingent consideration is based on Level 3 inputs. Further changes in the fair value of the contingent consideration will be recorded through operating income (loss). The contingent consideration was valued at the date of acquisition using the Monte Carlo method reflecting the average expected monthly revenue, an annual risk-free rate of 2.78%, and an annual revenue volatility rate of 40%.

The identifiable intangible assets were primarily valued using the excess earnings, relief from royalty, and loss-of-revenue methods using discount rates ranging from 8.0% to 21.0% and a 1.0% royalty rate, where applicable, except for certain backlog intangible assets held for sale that were valued at fair value less costs to sell using a discount rate of 8%. The amortizable intangible assets held for use are being amortized on a straight-line basis over their estimated useful lives. Intangible assets held for sale are not amortized. We allocated the excess of the purchase price over the fair value of assets acquired and liabilities assumed to goodwill, which is deductible for tax purposes. The goodwill arising from the Elauwit acquisition is attributable primarily to expected synergies and other benefits, including the acquired workforce, from combining Elauwit with us.

ASC 805 provides for a measurement period not to exceed one year from the acquisition date to adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. During the nine months ended September 30, 2019, we recorded measurement period adjustments to: (i) increase the value of backlog intangible assets held for sale by $750 as a result of the identification of additional assets that were acquired; (ii) decrease the value of backlog intangible assets by $48 as a result of an adjustment made to the fair value of an acquired customer contract; and (iii) increase the value of accrued expenses and other liabilities and reduce the indemnification liability by $566 as a result of the identification of previously undisclosed liabilities of the sellers. The measurement period adjustments resulted in a net decrease to goodwill of $1,061. Intangible assets held for sale are included within prepaid expenses and other current assets on the condensed consolidated balance sheets. The following summarizes the final purchase price allocation:


			Weighted Average
			Estimated Useful
	Fair Value		Life (years)
Consideration:
Cash paid	$	15,576
Holdback consideration		12,075
Contingent consideration		961
Total consideration	$	28,612
Recognized amounts of identifiable assets acquired and liabilities assumed:
Accounts receivable	$	4,494
Prepaid expenses and other current assets		1,687
Property and equipment		195
Other non-current assets		177
Accounts payable		(2,049)
Accrued expenses and other liabilities		(1,249)
Deferred revenue		(3,854)
Other non-current liabilities		(307)
Net tangible liabilities acquired		(906)
Backlog		6,982	5.0
Backlog-held for sale		750	—
Customer relationships		2,490	10.0
Partner relationships		1,200	10.0
Transition services agreement		540	2.0
Non-compete agreement		1,380	3.0
Goodwill		16,176
Total purchase price	$	28,612

The following table presents the results of Elauwit included in the Company’s revenue and net loss:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
	(Unaudited)
Revenue	$	5,745	$	5,082	$	19,049	$	5,082
Net loss		(1,658)		(571)		(5,674)		(571)

Pro forma results (Unaudited)

The following table presents the unaudited pro forma results of the Company for the three and nine months ended September 30, 2018 as if the acquisition of Elauwit had occurred on January 1, 2017 and therefore includes Elauwit’s revenue and net income (loss), as adjusted, for such period. These results are not intended to reflect the actual operations of the Company had the acquisition occurred on January 1, 2017. Income taxes were calculated based on the projected annual effective tax rate excluding discrete items as of September 30, 2018. Acquisition transaction costs have been excluded from the pro forma net income (loss).


	Three Months Ended		Nine Months Ended
	September 30, 2018		September 30, 2018
Revenue	$	67,917	$	200,885
Net income (loss)		104		(1,221)
Net loss attributable to common stockholders		(492)		(2,668)
Net loss per share attributable to common stockholders
Basic	$	(0.01)	$	(0.06)
Diluted	$	(0.01)	$	(0.06)