Business Acquisitions

Fiscal 2017

On August 1, 2016, the Company acquired all of the outstanding shares of Visicon Technologies, Inc. (Visicon), a leading supplier of high-accuracy and high-throughput measurement and defect detection systems based in Napa, California. The consideration under the merger agreement is subject to adjustment for indebtedness, seller's transaction expenses, working capital and other items.

Based on estimated closing working capital and other adjustments, the Company paid $2.0 million in cash and expects to issue 637,082 shares of ESI common stock, valued at approximately $4.5 million. The value of the common stock is based on the closing price of stock on August 1, 2016. Of the expected shares to be issued in connection with the agreement, 33,143 shares, adjusted for working capital changes, were reserved in escrow to serve as a source of payment for any purchase price adjustments or indemnity claims by the Company. The sellers have contractually agreed to limitations on the sale of the shares of common stock they receive in connection with the sale of Visicon; specifically, no shares were able to be sold for six months following closing, after which point twenty-five percent of the shares become salable each quarter thereafter. The shares issued as a part of this merger represented a non-cash investing activity of $4.5 million.

As of the reporting date, the Company had not yet finalized the valuation of assets acquired, liabilities assumed, and consideration transferred, and the amounts presented below represent provisional amounts based on best estimates. The purchase accounting is not final, pending final negotiation and settlement of amounts in escrow. The provisional amounts shown below may be revised if additional information regarding the fair value of the associated assets acquired, liabilities assumed and consideration transferred as of the acquisition date is identified. The total estimated purchase price of $6.5 million, net of cash acquired, was allocated to the underlying assets acquired and liabilities assumed based on estimated fair value, as shown in the following table:



(In thousands)
Accounts receivable	$	391
Inventory	937
Prepaid expense and other current assets	116
Property, plant and equipment	641
Acquired intangibles	3,300
Goodwill	3,027
Other assets	26
Accounts payable and other accrued liabilities	(1,946		)
Total purchase price, net of cash acquired	$	6,492

The acquisition was expected to provide the Company with a portfolio of standalone defect detection systems for the medical device and consumer electronics markets. In addition to a standalone product portfolio and associated value streams, the Company believed the acquisition would provide complementary technology for integrated verification of laser machining, expand its presence into the medical device market, present an opportunity for enhanced vertical integration and result in synergies with the Company's current consumer electronics customer base.

The value of goodwill has not been finalized as the valuation of assets acquired and liabilities assumed and consideration transferred is not yet complete. None of the goodwill is expected to be deductible for tax purposes. The acquired intangible assets consisted primarily of approximately $2.1 million of developed technology. Identified intangible assets are expected to be amortized over their useful lives of one to six years.

In connection with the acquisition of Visicon, the Company is consolidating Visicon operations with ESI operations and streamlining manufacturing and development activities between Napa and existing ESI locations. Approximately $0.4 million in integration costs were incurred through 2017. These costs are included in Acquisition and integration costs in the Condensed Consolidated Statements of Operations, and include transaction fees, travel and other related costs.

The operating results of the acquired entity are included in the Company’s results of operations since the date of acquisition. Pro forma financial information has not been provided for the acquisition of Visicon as it is not material to the Company’s operations or financial position.

Fiscal 2015

On January 15, 2015, the Company acquired all of the outstanding shares of Wuhan Topwin Optoelectronics Technology Co., Ltd. (Topwin), a Chinese manufacturer of laser-based systems for $7.6 million in cash and 748,944 shares of ESI common stock issuable over a three year period, valued at approximately $2.9 million as of the acquisition date. Out of the $2.9 million in equity, one-half, or 374,472 shares, was contingent consideration and one-half, or 374,472 shares, was non-contingent to be issued over a three year period beginning June 30, 2015. The contingent consideration is based on the performance of Topwin, as evaluated against targets for net income for each year over a three year period. One-third of the contingent shares are issued after each year if the target is met for that year. However, failing to meet stated targets will result in none of the contingent shares being issued for that year. As of the acquisition date, the fair value of 374,472 shares of contingent consideration was estimated to be $0.4 million and the fair value of 374,472 shares of non-contingent consideration was estimated to be $2.5 million. The fair value of the non-contingent and contingent shares to be issued over the three year period was determined based on the estimated share price as of the issuance date derived through Monte Carlo simulation, discounted back to the acquisition date. The value of the contingent shares included an estimate of the probability of attainment of the net income targets. Analysis supporting the purchase price allocation included a valuation of assets and liabilities as of the closing date, an analysis of intangible assets and a detailed review of the opening balance sheet to determine other significant adjustments required to recognize assets and liabilities at fair value. Through the fourth quarter of 2017, zero and 212,217 shares of ESI common stock have been issued in connection with contingent and non-contingent consideration under the purchase agreement, respectively.

Additionally, the Company agreed to issue, on the same terms described above, up to approximately 513,328 shares valued at $2.0 million, which, together with cash amounts of $0.2 million, is treated as compensation to an employee in the Company who was also a former shareholder of Topwin. The compensation expense was to be recognized over a three year period. From acquisition through the fourth quarter of fiscal 2017, the Company has recognized $1.5 million in share-based compensation expense related to this agreement. From acquisition through the fourth quarter of fiscal 2017, zero and 145,427 shares of ESI common stock have been issued in connection with contingent and non-contingent components of compensation expense, respectively.

The total purchase price of approximately $10.5 million, net of cash acquired, was allocated to the underlying assets acquired and liabilities assumed based on their fair values, as shown in the following table:



(In thousands)
Accounts receivable, net of allowances of $268	$	454
Inventory	544
Prepaid expense and other current assets	295
Property, plant and equipment	23
Acquired intangibles	3,618
Goodwill	7,445
Accounts payable and other accrued liabilities	(1,859		)
Total purchase price, net of cash acquired	$	10,520

The acquisition was expected to enable the Company to gain entry into the low total-cost-of-ownership solutions market in China and the goodwill of approximately $7.4 million recognized as a result of the acquisition was assigned to the Topwin reporting unit. The premium paid over the fair value of the individual assets acquired and liabilities assumed reflected the Company’s view that this acquisition was the result of a competitive bid process and provided the Company with innovative design and manufacturing capabilities for laser-based manufacturing solutions across a variety of complementary applications, together with direct access to the local China market, supply chain and opto-electronics knowledge center. None of the goodwill was expected to be deductible for tax purposes.

As a result of the acquisition, the Company recorded approximately $4.9 million of identifiable assets, including $3.6 million of identifiable intangible assets and $1.9 million of identifiable liabilities. The acquired intangible assets consisted primarily of $3.5 million of developed technology to be amortized over their useful lives, which ranged from one to ten years.

In 2017, the Company did not incur any Topwin acquisition-related costs while it incurred approximately $0.2 million in 2016. These costs are included in Acquisition and integration costs in the Condensed Consolidated Statements of Operations. The operating results of this acquisition are included in the Company’s results of operations since the date of acquisition. Pro forma financial information has not been provided for the acquisition of Topwin as it is not material to the Company’s operations and overall financial position.

In the first quarter of 2017, the Company entered into an agreement with former Topwin shareholders to settle claims against withheld shares. Pursuant to the purchase agreement and the subsequent settlement agreement, the Company’s obligation to issue shares with a future issuance date, which served as a source of indemnification, was terminated, representing the effective recovery of 63,114 shares. At the date of recovery the shares had a closing price of $6.30 per share and an original fair value of $446 thousand. As a result, the withheld shares which were initially accounted for as stock compensation were deemed to have been forfeited in the first quarter of 2017 and those shares representing contingent consideration and included as a component of purchase price were accounted for within equity. This subsequent recovery of shares issuable under the agreement represented a non-cash investing and financing activity.

In the second quarter of 2017, as a result of this same settlement agreement, all cash amounts held in escrow were released to the Company, representing the recovery of $430 thousand, slightly less than the original cash escrow of $450 thousand due to exchange rate losses. As a result of this recovery, amounts previously recognized as compensation costs were reversed in the current period and those amounts included as a component of purchase price were recognized as a non-operating gain in the second quarter of 2017, and classified accordingly on the statement of cash flows. The purchase price of Topwin was not adjusted for either the stock or cash escrow recoveries as the measurement period for purchase price accounting related to this acquisition had lapsed prior to the recovery of these amounts.