Business Acquisitions

Micron Optics, Inc.

On October 15, 2018, we acquired substantially all of the assets, other than cash, of the United States operations of Micron Optics, Inc. ("MOI") for cash consideration of $5.5 million. For the year ended December 31, 2019, we recognized revenue of $10.8 million and operating income of $1.8 million associated with the acquired operations of MOI. For the period from the closing of the MOI acquisition through December 31, 2018, we recognized revenue of $2.6 million and operating income of $1.1 million.

General Photonics Corporation

On March 1, 2019, we acquired the outstanding stock of General Photonics Corporation ("GP") for cash consideration of $19.0 million. Of the purchase price, $17.1 million was paid at closing and $1.9 million was placed into escrow for possible working capital adjustments to the purchase price and potential satisfaction of certain post-closing indemnification obligations. Additionally, we may become obligated to pay additional cash consideration of up to $1.0 million if certain revenue targets for the GP historical business are met for the twelve-month period following the closing. We currently estimate the fair value of the contingent obligation to be $1.0 million, which is shown in accrued liabilities on the consolidated balance sheet. The fair value of the contingent obligation was determined using the present value of estimated likely future payments.

For the period from the closing of the GP acquisition through December 31, 2019, we recognized revenue of $10.5 million and operating income of $1.4 million. Operating income for the period from the closing of the acquisition through December 31, 2019 included $1.6 million in amortization expense for the acquired intangibles and step-up in value of acquired inventory associated with the acquisition of GP. Operating income for the year ended December 31, 2019 also included $0.9 million of costs associated with the acquisition of GP. The amortization expense for the acquired intangibles as well as the costs associated with the acquisition of GP are included in the cost of goods sold and selling, general and administrative expense in our consolidated statements of operations.

These acquisitions have been accounted for under the acquisition method of accounting in accordance with ASC 805 - Business Combinations. Under ASC 805, the total estimated purchase consideration is allocated to the acquired tangible and intangible assets and assumed liabilities based on their estimated fair values as of the acquisition date. Any excess of the fair value of the acquisition consideration over the identifiable assets acquired and liabilities assumed is recognized as goodwill. We have completed our allocation of the purchase consideration for the MOI and GP acquisitions.

The following table summarizes the allocation of the purchase consideration of each acquisition:



	MOI			GP
Accounts receivable	$	1,742,693		$	1,520,950
Inventory	1,435,606			2,698,000
Other current assets	69,951			763,873
Property and equipment	996,460			286,000
Identifiable intangible assets	1,650,000			8,200,000
Goodwill	29,760			10,511,916
Accounts payable and accrued expenses	(379,737		)	(4,076,489		)
Total purchase consideration	$	5,544,733		$	19,904,250

The identifiable intangible assets and their estimated useful lives were as follows:



	Estimated	Estimated Fair Value
	Useful Life	MOI		GP
Developed technology	5 - 8 years	$	1,200,000	$	7,200,000
In-process research and development	7 years	200,000		—
Trade names and trademarks	3 years	150,000		400,000
Customer base	7 - 15 years	100,000		600,000
		$	1,650,000	$	8,200,000

Developed technologies acquired primarily consist of MOI's technologies related to fiber optic sensing instruments, modules, and components and GP's technologies relating to the measurement and control of the polarization of light. The developed technologies were valued using the "multi-period excess earnings" method, under the income approach. The multi-period excess earnings method reflects the present value of the projected cash flows that are expected by the developed technologies less charges representing the contribution of other assets to those cash flows. Discount rates of 24.5% and 17% were used to discount these cash flows of MOI and GP, respectively, to present value.

In-process research and development represents the fair value of an incomplete MOI research and development project that had not reached technological feasibility as of the closing date of the acquisition. In the fourth quarter of 2019, the fair value of this project at the closing date of the acquisition will begin being amortized following the project's completion. The fair value of in process research and development was determined using the multi-period excess earnings method. A discount rate of 29.5% was used to discount these cash flows to the present value.

Customer base represents the fair value of projected cash flows that will be derived from the sale of products to existing customers of MOI and GP as of the respective closing dates of their acquisitions. Customer relationships were valued using the "distributor" method, under the income approach. Under this premise, the margin of a distributor within the industry is deemed to be the margin attributable to customer relationships. This isolates the cash flows attributable to the customer relationships for which a market participant would be willing to pay. Discount rates of 24.5% and 16% were used to discount these cash flows of MOI and GP, respectively, to present value.

Trade names and trademarks are considered a type of guarantee of a certain level of quality or performance represented by the MOI and GP brands. Trade names and trademarks were valued using the "relief from royalty" method of the income approach. This method is based on the assumption that in lieu of ownership, a market participant would be willing to pay a royalty in order to exploit the related benefits of this asset. Discount rates of 17% and 16% were used to discount these cash flows of MOI and GP, respectively, to the present value.

Goodwill represents the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed in connection with the acquisition. Goodwill generated from our business acquisitions was primarily attributable to expected synergies from future growth.

Pro forma consolidated results of operations

The following unaudited pro forma financial information presents combined results of operations for each of the periods presented as if the acquisitions of MOI and GP had been completed on January 1, 2018. The pro forma information includes adjustments to depreciation expense for property and equipment acquired and amortization expense for the intangible assets acquired and the elimination of transaction expenses recognized in each period. Transaction-related expenses associated with the acquisition and excluded from pro forma income from continuing operations were $1.0 million for the year ended December 31, 2019. There were no transaction-related expenses associated with the acquisition for the year ended December 31, 2018. The pro forma data are for informational purposes only and are not necessarily indicative of the consolidated results of operations or the combined business had the acquisitions of MOI and GP occurred on January 1, 2018, or the results of future operations of the combined business. For instance, planned or expected operational synergies following the acquisition are not reflected in the pro forma information. Consequently, actual results will differ from the unaudited pro forma information presented below.



	Years Ended December 31,
	2019		2018
	(unaudited)		(unaudited)
Revenue	$	72,576,902	$	60,249,896

Income from continuing operations	$	6,912,802	$	1,559,008