Acquisition

On July 22, 2015, the Company entered into a Share Purchase Agreement (the “Purchase Agreement”) and completed the acquisition of all of the outstanding shares of capital stock of Farncombe France SARL, an entity formed under the laws of France, and Farncombe Technology Limited, a company incorporated and registered in England and Wales (collectively, the “Farncombe Entities”). The Farncombe Entities operate primarily in the U.K. and Europe and are in the business of providing strategic consultancy, content security, testing and implementation services for broadcast and broadband internet digital television. Farncombe’s experience in these areas along with Cartesian’s strategic, operational and technical capabilities in serving global service providers strengthens the Company’s ability to support convergence and quad play offerings in this growing market.

The total purchase price, subject to adjustment in accordance with the terms of the Purchase Agreement, was £4,360,620 pounds sterling (approximately US$6.8 million based on an exchange rate of £1.000 = US$1.556 as of July 21, 2015) comprised of:


•	Cash paid at the closing in the amount of £654,093 pounds sterling (approximately US$1.0 million based on an exchange rate of £1.000 = US$1.556 as of July 21, 2015) which was funded from our available cash on hand and represents 15% of the purchase price.

•

£1,308,186 pounds sterling (approximately US$2.0 million based on an exchange rate of £1.000 = US$1.556 as of July 21, 2015) settled by the issuance of 588,567 shares of Company common stock at the closing which equals 30% of the purchase price. The number of shares issued at the closing was calculated using a volume-weighted average share price for Company common stock on the Nasdaq Stock Market for the 30 days ending on the day before the date of the signing of the Purchase Agreement and based upon the average pounds sterling to dollar exchange rate recorded by the Financial Times for the 30 days ending on the day before the date of signing of the Purchase Agreement. The share price resulting from this calculation was £2.22 pounds sterling per share (US$3.46 per share).

•

Additional consideration in the amount of £654,093 pounds sterling (approximately US$1.0 million based on an exchange rate of £1.000 = US$1.556 as of July 21, 2015) which represents 15% of the purchase price, payable after the closing in accordance with the Purchase Agreement upon determination of the net working capital of the Farncombe Entities as prescribed in the Purchase Agreement, and as adjusted based upon the relative amounts of the net working capital of the Farncombe Entities as of May 31, 2015 and the closing and as compared to the target amount of net working capital as provided in the Purchase Agreement.


•	Earn-out consideration (the “Earn-Out”) which is potentially payable in cash and/or shares of Company common stock as elected by each Seller in the Purchase Agreement and represents 40% of the purchase price as described below.

The aggregate amount potentially payable pursuant to the Earn-Out consists of cash in an amount up to £719,483 pounds sterling (approximately US$1.0 million based on an exchange rate of £1.000= US$1.338 as of July 2, 2016) and up to 461,055 shares of Company common stock (approximately £1,024,765 pounds sterling or US$1.4 million based on an exchange rate of £1.000= US$1.338 as of July 2, 2016) and based upon the value of the shares as described below. Amounts, if any, payable under the Earn-Out are based upon the amounts of specified revenues attributable to the Farncombe Entities after June 1, 2015 through July 22, 2017, as defined in the Purchase Agreement. Pursuant to the Purchase Agreement, the number of shares of Company common stock payable under the Purchase Agreement at the closing and pursuant to the Earn-Out was determined based on the volume weighted average share price for Company common stock on the Nasdaq Stock Market for the 30 days ending on the day before the date of signing of the Purchase Agreement and based upon the average pounds sterling to dollar exchange rate recorded by the Financial Times for the 30 days ending on the day before the date of signing of the Purchase Agreement.

In October 2015, the Company paid approximately $2.1 million to the former shareholders of the Farncombe Entities with respect to the consideration payable related to net working capital as adjusted pursuant to the Purchase Agreement. This represented payment of a portion of the purchase price in the amount of £654,093 pounds sterling (approximately US$1.0 million) payable in accordance with the Purchase Agreement along with an additional £743,753 pounds sterling (approximately US$1.1 million) related to the working capital adjustment for excess working capital under the Purchase Agreement. In March 2016, the Company paid additional amounts of approximately £184,000 and €12,000 (approximately US$0.3 million) to the former shareholders of the Farncombe Entities with respect to net working capital as adjusted. An immaterial amount remains under negotiation with the former shareholders of the Farncombe Entities related to net working capital as adjusted pursuant to the Purchase Agreement.

The Purchase Agreement contains non-compete and non-solicitation agreements of the individual former shareholders of the Farncombe Entities. The Purchase Agreement also contains customary warranties, covenants and indemnification provisions.

The Company accounted for the acquisition of the Farncombe Entities using the acquisition method as required in FASB ASC 805, “Business Combinations.” Based on the acquisition method of accounting, the consideration was allocated to the assets and liabilities acquired based on their fair values as of the acquisition date. Any remaining amount of the purchase price allocation was recorded as goodwill. The Farncombe Entities are included in the Company’s EMEA segment.

Purchase Price

The total purchase price transferred to effect the acquisition of the Farncombe Entities was as follows:



	(in thousands)
Cash paid at closing	$	1,015
Equity issued at closing	2,036
Fair value of contingent consideration	1,921
Working capital adjustment	2,485
Total purchase price	$	7,457

Purchase Price Allocation

Total purchase consideration was allocated to the tangible and intangible assets and to liabilities assumed based on their respective acquisition-date fair values. The purchase price allocation is summarized in the following table:



	(in thousands)
Tangible assets and liabilities
Cash	$	1,378
Accounts receivable, net	4,627
Other current assets	191
Other non-current assets	137
Accounts payable	(1,874		)
Accrued payroll and related expenses	(796		)
Other current liabilities	(636		)
Non-current deferred tax liability	(264		)
Intangible assets	1,260
Goodwill	3,434
Net assets acquired	$	7,457

Based on the results of the acquisition valuation, the Company allocated approximately $1.3 million of the purchase price to identifiable intangible assets. The following table summarizes the major classes of intangible assets, as well as the respective weighted-average amortization periods:



	Amount (in thousands)		Weighted- Average Amortization Period (Years)
Identifiable Intangible Assets
Tradename	$	90	0.5
Non-compete agreements	60		4.5
Customer relationships	1,110		3.5
Total identifiable intangible assets	$	1,260

The excess of purchase consideration over net assets assumed was recorded as goodwill, which represented the strategic value assigned to the Farncombe Entities, including the expected benefit from synergies resulting from the transaction, as well as the knowledge and experience of the workforce in place. In accordance with applicable accounting standards, goodwill was not amortized but instead was tested for impairment at least annually, or more frequently, if certain indicators were present. The goodwill and intangible assets related to this acquisition are not deductible for foreign tax purposes. The goodwill related to the acquisition of the Farncombe Entities was recorded in the Company's EMEA reporting unit. See Note 4, Goodwill and Intangible Assets, for discussion of impairment of goodwill, including the goodwill associated with the Farncombe Entities.

The fair values of assets acquired and liabilities assumed are based on estimates of fair values as of the acquisition date. Management believes the fair values recognized for the assets acquired and liabilities assumed are based on reasonable estimates and assumptions.

The Company has classified the Earn-Out liability as a Level 3 liability and the fair value of the Earn-Out liability is evaluated each reporting period with changes in its fair value included in the Company’s results of operations. During the thirteen weeks and twenty-six weeks ended July 2, 2016, the change in the fair value of the Earn-Out liability was a decrease of $53,000 and a decrease of $301,000, respectively, which is included in Selling, general and administrative expenses on the Condensed Consolidated Statements of Operations and Comprehensive Loss. The balance of the Earn-Out liability as of July 2, 2016 and January 2, 2016 was $1,875,000 and $2,176,000, respectively, which is recorded as a non-current liability on the Condensed Consolidated Balance Sheets. See Note 9, Fair Value Measurements, for discussion of the determination of fair value of the Earn-Out liability.

If the Earn-Out were to be achieved prior to the end of the Earn-out period, the former shareholders of the Farncombe Entities could request payment prior to the end of the Earn-out period. Management’s current expectations are that it will not be achieved within the next 12 months and therefore has classified the liability as non-current.

Pro Forma Financial Information

The following unaudited condensed pro forma financial information presents the results of operations as if the acquisition had taken place on the first day of fiscal 2015. These amounts were prepared in accordance with the acquisition method of accounting under existing standards and are not necessarily indicative of the results of operations that would have occurred if our acquisition of the Farncombe Entities had been completed on the first day of fiscal 2015, nor are they indicative of our future operating results. Pro forma adjustments consist solely of adjustments to record intangible amortization expense of $104,000 and $207,000 for the thirteen weeks and twenty-six weeks ended July 4, 2015. The basic and diluted shares outstanding used to calculate the pro forma net loss per share amount presented below have been adjusted to assume shares issued at the closing of the acquisition of the Farncombe Entities were outstanding since the beginning of fiscal 2015.



Dollars in thousands except per share data	Thirteen Weeks Ended			Twenty-six Weeks Ended
	July 4, 2015			July 4, 2015
Revenue	$	21,385		$	43,398
Net loss	$	(2,356	)	$	(3,227	)
Net loss per share	$	(0.26	)	$	(0.37	)
Weighted-average shares used in calculation of pro forma net loss per share:
Basic and diluted shares outstanding	8,769			8,724