Business combination

9 Months Ended

Sep. 30, 2015

Business combination [Abstract]

Business Combinations

Note 5. Business combination

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 aims to strengthen 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 uses 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 are subject to refinement, including the acquired property, plant and equipment, prepaid and other current assets and accounts payable, as the Company is in the process of obtaining further information. As a result, during the preliminary measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. As of September 30, 2015, the Company recorded $1.1 million in goodwill, 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. Subsequent to the initial allocation of the assets acquired and liabilities assumed, the Company reduced the acquired net accounts receivable by $0.2 million, increased the acquired net inventories by $0.1 million, reduced the assumed sales tax accrual by $0.1 million, increased the acquired prepaid expenses and other current assets by an immaterial amount, and increased goodwill by a corresponding net amount.

The following table summarizes the allocation of the assets acquired and liabilities assumed 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, 2015 and 2014 as though the companies had been combined as of the beginning of 2014. In the three and nine months ended September 30, 2015, revenue related to products acquired from EMCORE was $13.2 million and $39.5 million, respectively. The pro forma financial information reflects adjustments related to transactions costs of $0.3 million in the nine months September 30, 2015 and 2014, as well as immaterial employee expense in the nine months ended September 30, 2015. Incremental intangible amortization, inventory and depreciation adjustments were also added to the 2014 periods. There were no sales between the business acquired from EMCORE and the Company in the three and nine months ended September 30, 2015 and 2014.

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,
	2015		2014		2015		2014
Revenue	$	83,560	$	95,683	$	250,316	$	262,217
Net income (loss)	$	1,404	$	(1,951)	$	3,689	$	(24,781)
Basic net income (loss) per share	$	0.03	$	(0.06)	$	0.10	$	(0.78)
Diluted net income (loss) per share	$	0.03	$	(0.06)	$	0.10	$	(0.78)