Business combination

9 Months Ended

Sep. 30, 2016

Business combination

Business combination

Note 5. Business combination

EMCORE Corporation

On January 2, 2015, the Company closed an acquisition of the tunable laser product lines of EMCORE Corporation (“EMCORE”) for an original purchase price of $17.5 million, pursuant to the terms of the Asset Purchase Agreement between the parties dated October 22, 2014, under which the Company purchased certain assets and assumed certain liabilities of EMCORE’s tunable laser product lines. Consideration for the transaction consisted of $1.5 million in cash and a promissory note (the “EMCORE Note”) of approximately $16.0 million, which was subject to certain adjustments for inventory, net accounts receivable and pre-closing revenues, and was subsequently adjusted to $15.5 million in connection with a True-Up Confirmation Agreement (the “True-Up Agreement”) executed by and between the Company and EMCORE on April 16, 2015.The True-Up Agreement made several final adjustments to the Asset Purchase Agreement, including, among other things, (i) adjusting the principal amount of the EMCORE Note from approximately $16.0 million to approximately $15.5 million, (ii) agreeing upon final amounts for inventory value adjustment, net accounts receivable adjustment, and revenue purchase price adjustment, and (iii) resolving the treatment of certain accounts receivable for products sold by EMCORE prior to the closing of the transaction. The adjusted purchase price for the acquisition was approximately $17.0 million.

The Company accounted for this acquisition as a business combination. With this acquisition, the Company strengthens its narrow line width tunable laser product portfolio.

In connection with the acquisition, the Company incurred approximately $0.9 million in total acquisition-related costs related to legal, accounting and other professional services. The acquisition costs were expensed as incurred and included in operating expenses in the Company’s condensed consolidated statement of operations.

The Company’s preliminary allocation of the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed was based on estimated fair values as of the close of the acquisition. The fair values assigned to intangible assets acquired are based on valuations using estimates and assumptions provided by management, with the assistance of an independent third party appraisal firm. The excess purchase price over those fair values is recorded as goodwill. These estimates were determined through established and generally accepted valuation techniques. While the Company used best estimates and assumptions as part of the purchase price allocation process to value assets acquired and liabilities assumed at the acquisition date, estimates and assumptions were subject to refinement, including the acquired property, plant and equipment, prepaid and other current assets and accounts payable, as the Company was in the process of obtaining further information. As a result, during the preliminary measurement period, which was completed in 2015, the Company recorded adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Subsequent to the initial allocation of the assets acquired and liabilities assumed, the Company adjusted the acquired net accounts receivable, the acquired net inventories, the assumed sales tax accrual and the acquired prepaid expenses and other current assets by immaterial amounts, and decreased goodwill by a corresponding net amount.

As of September 30, 2016 and December 31, 2015, goodwill was $1.1 million, which represented the excess of the purchase price over the aggregate net estimated fair values of the assets acquired and liabilities assumed in the acquisition.

The following table summarizes the allocation of the assets acquired and liabilities assumed from EMCORE as of the acquisition date and subsequent adjustments (in thousands): 

Total purchase consideration:
Cash paid	$	1,500
Notes payable		15,482
Total	$	16,982
Fair value of assets acquired:
Accounts receivable	$	9,274
Inventories		1,693
Prepaid expenses and other current assets		670
Property, plant and equipment		6,917
Intangible assets acquired:
Developed technology		4,100
Customer relationships		700
Total	$	23,354
Less: fair value of liabilities assumed:
Accounts payable	$	(7,427)
Accrued liabilities		(60)
Total	$	(7,487)
Goodwill	$	1,115

Purchased intangibles with finite lives will be amortized on a straight-line basis over their respective estimated useful lives. The following table presents details of the purchase price allocated to the acquired intangible assets at the acquisition date:

	Useful		Purchased
	Life		intangible assets
	(In years)		(In thousands)
Developed technology	7	$	4,100
Customer relationships	2		700
Total purchased intangible assets		$	4,800

The following unaudited supplemental pro forma information presents the combined results of operations of NeoPhotonics Corporation for the three and nine months ended September 30, 2016 and 2015 as though the companies had been combined as of the beginning of 2014. In the three months ended September 30, 2016 and 2015, revenue related to products acquired from EMCORE was $20.2 million and $13.2 million, respectively.  In the nine months ended September 30, 2016 and 2015, revenue related to products acquired from EMCORE was $58.3 million and $39.5 million, respectively. The following table reflects the actual results for the 2016 periods and the pro forma financial information for the 2015 periods and includes adjustments related to zero transaction costs in the three months ended September 30, 2016 and 2015 and zero and $0.3 million transactions costs, respectively, in the nine months ended September 30, 2016 and 2015, as well as immaterial employee expense during the 2015 periods. There were no sales between the business acquired from EMCORE and the Company in the three and nine months ended September 30, 2016 and 2015.

The unaudited pro forma results do not assume any operating efficiencies as a result of the consolidation of operations (in thousands, except per share data):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Revenue	$	103,312	$	83,560	$	301,586	$	250,316
Net income (loss)	$	(7,187)	$	1,404	$	(2,201)	$	3,689
Basic net income (loss) per share	$	(0.17)	$	0.03	$	(0.05)	$	0.10
Diluted net income (loss) per share	$	(0.17)	$	0.03	$	(0.05)	$	0.10

EigenLight Corporation

In November 2015, the Company closed an acquisition of the business and products of EigenLight Corporation for cash consideration of $0.4 million in an asset transaction. The Company accounted for this as a business combination and the majority of the purchase price was allocated to inventory and property, plant and equipment.