Quarterly report pursuant to Section 13 or 15(d)

Business Combinations

v3.22.1
Business Combinations
3 Months Ended
Mar. 31, 2022
Business Combinations [Abstract]  
Business Combinations

Note 4. Business Combinations

 

On January 7, 2021, the Company entered into a Stock Purchase Agreement, by and among the Company, NimbeLink Corp., the sellers set forth therein (the Sellers) and Scott Schwalbe in his capacity as seller representative (the Purchase Agreement). NimbeLink is an industrial Internet of Things (IoT) company focused on the design, development and delivery of edge-based cellular connectivity solutions for enterprise customers. The acquisition of NimbeLink supports the Company's transition toward becoming a more system-level company and will play an important role in the Company's overall growth strategy to broaden market diversification, especially within the industrial IoT space.

 

Pursuant to the Purchase Agreement, at the closing on January 7, 2021, the Company acquired all of the outstanding stock of NimbeLink for an upfront cash purchase price of approximately $15.0 million, subject to working capital and other customary adjustments of $1.0 million and $0.7 million in deferred cash payments due to the Sellers fifteen months after the close of the transaction. In addition, NimbeLink’s former security holders are entitled to receive $8.0 million in contingent consideration, due to achieving certain revenue targets in 2021. The Company assumed unvested common stock options of continuing employees and service providers.

 

Acquisition Consideration

 

The following table summarizes the fair value of purchase consideration to acquire NimbeLink (in thousands):

Cash

$

15,991

 

Deferred payments(1)

 

728

 

Contingent consideration(2)

 

5,986

 

Replacement options(3)

 

40

 

Total purchase consideration

$

22,745

 

 

(1) The fair value of the holdback payment was determined by discounting to present value, payments totaling $0.7 million expected to be made to NimbeLink fifteen months after the close of the transaction.

(2) The fair value of contingent consideration is based on applying the Monte Carlo simulation method to forecast achievement under various contingent consideration events which may result in up to $8 million in payments subject to the acquired business’s satisfying certain revenue targets in 2021. Key inputs in the valuation include forecasted revenue, revenue volatility and discount rate. Underlying forecast mathematics were based on Geometric Brownian Motion in a risk-neutral framework and discounted back to the applicable period in which the accumulative thresholds were achieved at discount rates commensurate with the risk and expected payout term of the contingent consideration.

(3) Represents the pre-combination stock compensation expense for replacement options issued to NimbeLink employees.

 

Purchase Price Allocation

 

The following is an allocation of purchase price as of the closing date based upon an estimate of the fair value of the assets acquired and liabilities assumed by the Company in the acquisition (in thousands):

 

Cash

$

1,806

 

Accounts receivable

 

1,127

 

Inventory

 

1,671

 

Prepaids and other current assets

 

141

 

Property and equipment

 

151

 

Right of use assets

 

402

 

Other assets

 

194

 

Identified intangible assets

 

14,065

 

Accounts payable

 

(654

)

Accrued compensation

 

(139

)

Accrued expenses and other current liabilities

 

(432

)

Short-term lease liabilities

 

(78

)

Long-term lease liabilities

 

(324

)

Deferred tax liabilities

 

(2,330

)

Identifiable net assets acquired

 

15,600

 

Goodwill

 

7,145

 

Total purchase price

$

22,745

 

The following is a summary of identifiable intangible assets acquired and the related expected lives for the finite-lived intangible assets (in thousands):

Category

Estimated life
(in years)

Fair value

 

Finite-lived intangible assets:

 

 

 

Market-related intangibles

5

$

1,700

 

Customer relationships

5

 

8,950

 

Developed technology

12

 

2,600

 

Covenants to non-compete

2

 

115

 

Indefinite-lived intangible assets:

 

 

 

In-process research and development

N/A

 

700

 

Total identifiable intangible assets acquired

 

$

14,065

 

 

Assumptions in the Allocations of Purchase Price

 

Management prepared the purchase price allocations and in doing so considered or relied in part upon reports of a third party valuation expert to calculate the fair value of certain acquired assets, which primarily included identifiable intangible assets and inventory, and the portions of the purchase consideration expected to be paid to NimbeLink securityholders in the future, as described above. Certain NimbeLink securityholders that are employees are not required to remain employed in order to receive the deferred payments and

contingent consideration; accordingly, the fair value of the deferred payments and contingent consideration have been accounted for as a portion of the purchase consideration.


Estimates of fair value require management to make significant estimates and assumptions. Contingent consideration payable as of March 31, 2022 and December 31, 2021
, was $8.0 million. The contingent consideration balance was recorded to deferred purchase price liabilities in other current liabilities in the Company's condensed consolidated balance sheet. The contingent consideration of $8.0 million and deferred payment of $0.6 million were paid in April 2022.

 

The goodwill recognized is attributable primarily to the acquired workforce, expected synergies, and other benefits that the Company believes will result from integrating the operations of the NimbeLink business with the operations of the Company. Certain liabilities included in the purchase price allocations are based on management’s best estimates of the amounts to be paid or settled and based on information available at the time the purchase price allocations were prepared.

 

The fair value of the customer relationships was determined using the multi-period excess earnings method (MPEEM). MPEEM estimates the value of an intangible asset by quantifying the amount of residual (or excess) cash flows generated by the asset and discounting those cash flows to the present. Future cash flows for contractual and non-contractual customers were estimated based on forecasted revenue and costs, taking into account the growth rates and contributory charges. The fair value of market-related intangible assets, developed technology, and in-process research and development (IPR&D) was determined using the Relief-from-Royalty method. The Relief-from-Royalty method is a specific application of the discounted-cash-flow method, which is a form of the income approach. It is based on the principle that ownership of the intangible asset relieves the owner of the need to pay a royalty to another party in exchange for rights to use the asset. Key assumptions to estimate the hypothetical royalty rate include observable royalty rates, which are royalty rates in negotiated licenses and market-based royalty rates which are royalty rates found in available market data for licenses involving similar assets. Developed technology will begin amortizing immediately and IPR&D will begin amortizing upon the completion of each project. During the three months ended March 31, 2021, all IPR&D projects were completed and transferred to developed technology, with a twelve-year estimated life. The fair value of non-compete intangible assets was estimated using the with-and-without method. The with-and-without method estimates the value of an intangible asset by quantifying the loss of economic profits under a hypothetical condition where only the subject intangible does not exist and needs to be re-created. Projected revenues, operating expenses and cash flows are calculated in each "with" and "without" scenario and the difference in the cash flow is discounted to present value. Inventory was valued at net realizable value. Raw materials were valued at book value and finished goods were valued assuming hypothetical revenues from finished goods adjusted for disposal costs, profit attributable to the seller and holding costs. An inventory step-up of $0.4 million is included in the purchase price allocation above.

 

The Company assumed liabilities in the acquisition which primarily consist of accrued employee compensation and certain operating liabilities. The liabilities assumed in these acquisitions are included in the respective purchase price allocations above.


Goodwill recorded in connection with the NimbeLink acquisition was
$7.1 million. The Company does not expect to deduct any of the acquired goodwill for tax purposes. Also see Note 8, Intangible Assets for further information on intangible assets related to the NimbeLink acquisition.