7. Acquisitions

Business combinations are accounted for using the acquisition method of accounting. In general, the acquisition method requires acquisition-date fair value measurement of identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree. The measurement requirements result in the recognition of the full amount of acquisition-date goodwill, which includes amounts attributable to non-controlling interests. Neither the direct costs incurred to effect a business combination nor the costs the acquirer expects to incur under a plan to restructure an acquired business may be included as part of the business combination accounting. As a result, those costs are charged to expense when incurred, except for debt or equity issuance costs, which are accounted for in accordance with other generally accepted accounting principles.

Acquisition of Nexgen Wireless, Inc.

On February 27, 2015, the Company acquired substantially all of the assets of, and assumed certain specified liabilities of, Nexgen Wireless, Inc., an Illinois corporation (“Nexgen”), pursuant to an Asset Purchase Agreement dated as of February 27, 2015 (the “Nexgen APA”) among PCTEL, Inc., Nexgen, PCTEL, Nexgen, Bhumika Thakkar 2012 Irrevocable Trust Number One, Bhumika Thakkar 2012 Irrevocable Trust Number Two, and Jigar Thakkar (collectively, such trusts and Mr. Thakkar are the “Nexgen Shareholders”), and Bhumika Thakkar (collectively with Nexgen and the Nexgen Shareholders, the “Nexgen Parties”).

The business of Nexgen is based in Schaumburg, Illinois. Nexgen provides Meridian™, a network analysis tool portfolio, and engineering services. Nexgen’s Meridian software product portfolio translates real-time network performance data into engineering actions to optimize operator performance. Meridian, with its modules of Network IQ™, Subscriber IQ™, and Map IQ™, supports crowd-based, cloud-based data analysis to enhance network performance. Nexgen provides performance engineering, specialized staffing, and trend analysis for carriers, infrastructure vendors, and neutral hosts for 2G, 3G, 4G, and LTE networks.

The provisional purchase consideration for Nexgen was $21.4 million, consisting of $18.25 million in cash paid at closing, $2.25 million held in escrow, an estimated $0.8 million excess working capital true up to be paid in cash, and a contingency payment that was provisionally calculated with a fair value of $0.1 million. The contingent payment was dependent on the achievement of revenue-based goals pertaining to the acquired business for the period commencing on March 1, 2015 and ending on April 30, 2016. The cash consideration paid was provided from the Company’s existing cash. The assets acquired consisted primarily of customer relationships, intellectual property (including trade names), working capital (accounts receivable, work in process, accounts payable and accrued liabilities), and fixed assets. The Nexgen Parties are bound by non-competition covenants under the Nexgen APA, which generally expire on February 27, 2019. The Company calculates the fair value of the assets acquired by using a blended analysis of the present value of future discounted cash flows and the market approach of valuation. The intangible assets recorded have a weighted average amortization period of 5.0 years.

As previously reported in the Company’s Current Report on Form 8-K filed with the SEC on April 14, 2015, on April 7, 2015, Samsung Electronics America, Inc., as successor in interest to Samsung Telecommunications America, LLC (“Samsung”), provided Nexgen and the Company with a final notice of Samsung’s election to terminate, effective April 30, 2015, the Contractor Services Agreement, dated May 2, 2012 (the “CSA”), by and between Samsung and Nexgen. On May 5, 2015, the Company and the Nexgen Parties entered into an Amendment to Asset Purchase Agreement (the “Nexgen APA Amendment”) with the following principal terms: (a) Nexgen agreed to transfer to the Company previously excluded accounts receivable with an aggregate value of $0.8 million; (b) the aggregate amount potentially payable to the Nexgen Parties as contingent earnout consideration was reduced from $2.0 million to $1.0 million; (c) the Company waived its right to seek additional indemnification from the Nexgen Parties for matters specified therein; (d) the parties directed that $2.25 million in escrowed funds potentially payable to the Nexgen Parties pursuant to the Nexgen APA be released to the Company; (e) Mr. Thakkar relinquished a portion of the equity awards previously granted to him; (f) the Company released various potential claims against Nexgen and the Nexgen Parties with respect to the termination of the CSA and related matters; and (g) the parties agreed that the Nexgen Parties would be eligible for potential additional consideration if the acquired business achieves performance metrics set forth therein. The additional consideration is dependent on the achievement of revenue-based goals pertaining to the acquired business for the period commencing on January 1, 2016 and ending on December 31, 2016. The amendment terms were accounted for consistent with accounting for legal settlements, as there is not a clear and direct link between the settlement and the acquisition price. During June 2015, the Company received the cash from the escrow fund and the previously excluded accounts receivable. These amounts are recorded in Other Income, net in the condensed consolidated statements of operations. At June 30, 2015, the Company estimated the liability for the contingent earnout consideration at $1.0 million. At September 30, 2015, the Company revised the liability for the contingent earnout consideration at $0.5 million due to revised revenue projections for 2016. The adjustment of $0.9 million from the original liability recorded for the contingent consideration was recorded as an expense in Other Income, net in the condensed consolidated statement of operations.

Approximately 78% of Nexgen’s revenue was related to the U.S. Sprint cellular network, contracted either with Samsung or Sprint directly. During due diligence, the Company modeled a likely range of future revenue and cash flow based on the high degree of customer concentration risk. While the terminated CSA represented a material portion of that revenue, the resulting total future revenue and cash flow remained within the lower range of the forecast model. The Company utilized the lower end of the forecast range in evaluating the fair value of the acquired assets. At September 30, 2015, the valuation yielded provisional goodwill of $3.3 million, of which $1.5 million is related to the assembled workforce. The goodwill is deductible for tax purposes. Based on revisions to the Nexgen valuation, goodwill was lowered by $0.6 million and customer relationships was increased by $0.6 million during the third quarter 2015.

The purchase accounting related to the valuation of certain tangible and intangible assets was still in process at September 30, 2015. The purchase accounting is expected to be completed by the quarter ended December 31, 2015. The following is the provisional allocation of the purchase price for the assets from Nexgen at the date of the acquisition as of September 30, 2015:


Tangible assets:
Accounts receivable	$	5,358
Prepaid and other assets		49
Deferred cost of sales		24
Fixed assets		43

Total tangible assets		5,474

Intangible assets:
Customer relationships		8,117
Trade names		972
Technology		3,332
Backlog		162
Non-compete		583
Goodwill		3,332

Total intangible assets		16,498

Total assets		21,972

Accounts payable		200
Accrued liabilities		341

Total liabilities		541

Net assets acquired	$	21,431

A reconciliation of the assets acquired with the cash paid at closing is as follows:


Net assets acquired	$	21,431
Due Nexgen - contingent liability		(91	)
Due Nexgen - working capital adjustment		(840	)

Cash paid at closing	$	20,500

The Company does not have any material relationship with Mr. Thakkar and the other Nexgen Parties other than in respect of the Nexgen APA, the Nexgen APA Amendment, the transactions provided for therein, and Mr. Thakkar’s post-acquisition role as the Company’s Vice President and Chief Technology Officer, Network Analytics.

The Company assumed Nexgen’s existing lease for Nexgen’s offices in Schaumburg, Illinois and is currently operating the acquired business from that location. All of the Nexgen assets and employees were immediately integrated into the Network Engineering Services reporting unit within the RF Solutions segment. The Company recognizes revenue for the engineering services under the completed performance method. For specialized staffing, the Company recognizes revenue as services are provided to the customer.

Revenues for Nexgen were $23.8 million for the year ended December 31, 2014. The Company’s results for the nine months ended September 30, 2015 include the operating results for March through September 2015 for the business acquired from Nexgen. The following pro forma financial information gives effect to the acquisition of the Nexgen business as if the acquisition had taken place on January 1, 2014. The pro forma financial information for Nexgen was derived from the unaudited historical accounting records of Nexgen.


	(unaudited) Three Months Ended September 30, 2015			(unaudited) Three Months Ended September 30, 2014		(unaudited) Nine Months Ended September 30, 2015			(unaudited) Nine Months Ended September 30, 2014
REVENUES	$	26,526		$	33,155	$	83,435		$	95,508
NET INCOME	($	1,062	)	$	2,680	($	719	)	$	4,464
NET INCOME PER SHARE	($	0.06	)	$	0.15	($	0.04	)	$	0.24

The pro forma results include adjustments for intangible amortization of $0.6 million for the three months ended September 30, 2014 and $0.4 million and $2.0 million for the nine months ended September 30, 2015 and 2014, respectively. The pro forma information is presented for illustrative purposes only and may not be indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2014, nor is it necessarily indicative of the Company’s future consolidated results of operations or financial position.