MACOM Technology Solutions Holdings, Inc.
MACOM Technology Solutions Holdings, Inc. (Form: 10-Q, Received: 08/02/2017 15:09:40)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission File Number: 001-35451
 
MACOM Technology Solutions Holdings, Inc.
(Exact name of registrant as specified in its charter)  
 
Delaware
 
27-0306875
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
100 Chelmsford Street
Lowell, MA 01851
(Address of principal executive offices and zip code)
(978) 656-2500
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x

  
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
  
Smaller reporting company
¨
 
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
As of July 28, 2017 , there were 64,233,901 shares of the registrant’s common stock outstanding.




MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page No.
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Item 1.
Item1A.
Item 2.
Item 6.




PART I—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
 
 
June 30,
2017
 
September 30,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
167,606

 
$
332,977

Short term investments
81,641

 
23,776

Accounts receivable (less allowances of $7,887 and $3,279, respectively)
129,838

 
108,331

Inventories
120,345

 
114,935

Income tax receivable
20,617

 
21,607

Assets held for sale
31,519

 

Prepaid and other current assets
18,284

 
11,318

Total current assets
$
569,850

 
$
612,944

Property and equipment, net
121,413

 
99,167

Goodwill
313,726

 
120,024

Intangible assets, net
619,370

 
259,602

Deferred income taxes
2,070

 
89,606

Other long-term assets
6,450

 
7,208

TOTAL ASSETS
$
1,632,879

 
$
1,188,551

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of lease payable
$
888

 
$
1,152

Current portion of long-term debt
7,071

 
6,051

Accounts payable
31,316

 
30,579

Accrued liabilities
51,619

 
54,368

Liabilities held for sale
10,719

 

Total current liabilities
$
101,613


$
92,150

Lease payable, less current portion
15,117

 
2,463

Long-term debt, less current portion
662,260

 
573,882

Warrant liability
54,734

 
38,253

Deferred income taxes
11,731

 
11,765

Other long-term liabilities
8,043

 
7,254

Total liabilities
$
853,498


$
725,767

Stockholders’ equity:
 
 
 
Common stock
64

 
54

Treasury stock, at cost
(330
)
 
(330
)
Accumulated other comprehensive income
2,610

 
9,039

Additional paid-in capital
1,033,297

 
551,509

Accumulated deficit
(256,260
)
 
(97,488
)
Total stockholders’ equity
$
779,381


$
462,784

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
1,632,879

 
$
1,188,551

See notes to condensed consolidated financial statements.

1



MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
June 30,
2017
 
July 1,
2016
 
June 30,
2017
 
July 1,
2016
Revenue
$
194,555

 
$
142,288

 
$
532,391

 
$
391,641

Cost of revenue
101,926

 
68,326

 
292,403

 
191,836

Gross profit
92,629

 
73,962

 
239,988

 
199,805

Operating expenses:
 
 
 
 
 
 
 
Research and development
38,729

 
26,064

 
108,588

 
77,589

Selling, general and administrative
46,666

 
35,866

 
145,488

 
105,169

Impairment charges

 
760

 

 
11,765

Restructuring charges
586

 
1,092

 
2,342

 
2,100

Total operating expenses
85,981

 
63,782

 
256,418

 
196,623

Income (loss) from operations
6,648

 
10,180

 
(16,430
)
 
3,182

Other (expense) income
 
 
 
 
 
 
 
Warrant liability (expense) gain
(9,085
)
 
15,339

 
(16,481
)
 
(3,741
)
Interest expense, net
(7,178
)
 
(4,363
)
 
(21,902
)
 
(13,117
)
Other (expense) income
(1,139
)
 
16

 
(2,042
)
 
36

Total other (expense) income, net
(17,402
)
 
10,992

 
(40,425
)
 
(16,822
)
(Loss) income before income taxes
(10,754
)
 
21,172

 
(56,855
)
 
(13,640
)
Income tax expense (benefit)
3,223

 
(181
)
 
93,559

 
(6,178
)
(Loss) income from continuing operations
(13,977
)
 
21,353

 
(150,414
)
 
(7,462
)
(Loss) income from discontinued operations
(13,700
)
 
1,199

 
(8,358
)
 
3,794

Net (loss) income
$
(27,677
)
 
$
22,552

 
$
(158,772
)
 
$
(3,668
)
 
 
 
 
 
 
 
 
Net (loss) income per share:
 
 
 
 
 
 
 
Basic (loss) income per share:
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(0.22
)
 
$
0.40

 
$
(2.53
)
 
$
(0.14
)
(Loss) income from discontinued operations
(0.21
)
 
0.02

 
(0.14
)
 
0.07

(Loss) income per share - basic
$
(0.43
)
 
$
0.42

 
$
(2.67
)
 
$
(0.07
)
Diluted (loss) income per share:
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(0.22
)
 
$
0.11

 
$
(2.53
)
 
$
(0.14
)
(Loss) income from discontinued operations
(0.21
)
 
0.02

 
(0.14
)
 
0.07

(Loss) income per share - diluted
$
(0.43
)
 
$
0.13

 
$
(2.67
)
 
$
(0.07
)
Shares used:
 
 
 
 
 
 
 
Basic
64,019

 
53,516

 
59,524

 
53,253

Diluted
64,019

 
55,288

 
59,524

 
53,253

See notes to condensed consolidated financial statements.


2



MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
June 30,
2017
 
July 1,
2016
 
June 30,
2017
 
July 1,
2016
Net (loss) income
$
(27,677
)
 
$
22,552

 
$
(158,772
)
 
$
(3,668
)
Unrealized (loss) gain on short term investments, net of tax
(77
)
 
9

 
(71
)
 
20

Foreign currency translation (loss) gain, net of tax
(307
)
 
5,432

 
(6,358
)
 
10,970

Other comprehensive (loss) income, net of tax
(384
)
 
5,441

 
(6,429
)
 
10,990

Total comprehensive (loss) income
$
(28,061
)
 
$
27,993

 
$
(165,201
)
 
$
7,322

See notes to condensed consolidated financial statements.


3



MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)

 
 
 
 
 
Accumulated
Other
Comprehensive Income
(Loss)
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Common Stock
 
Treasury Stock
 
Shares
 
Amount
 
Shares
 
Amount
Balance at September 30, 2016
53,709

 
$
54

 
23

 
$
(330
)
 
$
9,039

 
$
551,509

 
$
(97,488
)
 
$
462,784

Stock options exercises
218

 

 

 

 

 
2,997

 

 
2,997

Vesting of restricted common stock and units
954

 

 

 

 

 

 

 

Issuance of common stock pursuant to employee stock purchase plan
146

 

 

 

 

 
5,165

 

 
5,165

Shares repurchased for stock withholdings on restricted stock awards
(370
)
 

 

 

 

 
(18,092
)
 

 
(18,092
)
Share-based compensation

 

 

 

 

 
27,666

 

 
27,666

Shares issued in connection with acquisition
9,589

 
10

 

 

 

 
465,072

 

 
465,082

Equity issuance costs

 

 

 

 

 
(1,020
)
 

 
(1,020
)
Other comprehensive loss, net of tax

 

 

 

 
(6,429
)
 

 

 
(6,429
)
Net loss

 

 

 

 

 

 
(158,772
)
 
(158,772
)
Balance at June 30, 2017
64,246

 
$
64

 
23

 
$
(330
)
 
$
2,610

 
$
1,033,297

 
$
(256,260
)
 
$
779,381

See notes to condensed consolidated financial statements.


4



MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine Months Ended
 
June 30, 2017
 
July 1, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net loss
$
(158,772
)
 
$
(3,668
)
Adjustments to reconcile net loss to net cash provided by operating activities (net of acquisitions):
 
 
 
Depreciation and intangibles amortization
65,823

 
52,612

Share-based compensation
27,666

 
19,407

Warrant liability expense
16,481

 
3,741

Acquired inventory step-up amortization
43,985

 
2,200

Deferred financing cost amortization
2,545

 
1,214

Acquisition prepaid compensation amortization
506

 
3,849

Loss on extinguishment of debt
2,008

 

Gain on disposition of business
(23,645
)
 
(3,750
)
Deferred income taxes
87,608

 
(1,845
)
Impairment charges

 
12,955

Changes in assets held for sale from discontinued operations
6,329

 

Other adjustments, net
285

 
899

Change in operating assets and liabilities (net of acquisitions):
 
 
 
Accounts receivable
(12,755
)
 
(558
)
Inventories
7,997

 
(25,092
)
Prepaid expenses and other assets
1,104

 
(3,157
)
Accounts payable
(4,718
)
 
(2,243
)
Accrued and other liabilities
(17,821
)
 
(280
)
Income taxes
4,063

 
(1,937
)
Net cash provided by operating activities
48,689

 
54,347

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Acquisition of businesses, net
(231,712
)
 
(85,516
)
Purchases of property and equipment
(24,496
)
 
(24,100
)
Proceeds from sale of assets
215

 

Proceeds from sales and maturities of investments
32,420

 
40,357

Purchases of investments
(90,508
)
 
(24,945
)
Proceeds from discontinued operations
23,645

 
3,750

Acquisition of intellectual property

 
(777
)
Net cash used in investing activities
(290,436
)
 
(91,231
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from notes payable
96,558

 

Payments of financing costs
(9,077
)
 

Proceeds from corporate facility financing obligation
4,250

 

Proceeds from stock option exercises and employee stock purchases
8,162

 
5,336

Payments on notes payable
(3,026
)
 
(2,625
)
Payments of capital leases and assumed debt
(928
)
 
(9,553
)
Repurchase of common stock
(18,092
)
 
(9,966
)
Payments of contingent consideration and other
(1,296
)
 
(1,195
)
Net cash provided by (used in) financing activities
76,551

 
(18,003
)
 
 
 
 
Foreign currency effect on cash
(175
)
 
(583
)
 
 
 
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
(165,371
)
 
(55,470
)
CASH AND CASH EQUIVALENTS — Beginning of period
$
332,977

 
$
122,312

CASH AND CASH EQUIVALENTS — End of period
$
167,606

 
$
66,842

 
 
 
 
Supplemental disclosure of non-cash activities
 
 
 
Issuance of common stock in connection with the AppliedMicro Acquisition ( See Note 2 - Acquisitions)
$
465,082

 
$

See notes to condensed consolidated financial statements.

5



MACOM TECHNOLOGY SOLUTIONS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information —The accompanying unaudited, condensed consolidated financial statements have been prepared according to the rules and regulations of the United States (the “U.S.”) Securities and Exchange Commission (“SEC”) and, in the opinion of management, reflect all adjustments, which include normal recurring adjustments, necessary for a fair statement of the condensed consolidated balance sheets, condensed consolidated statements of operations, condensed consolidated statement of comprehensive (loss) income, condensed consolidated statements of stockholders' equity and condensed consolidated statements of cash flows of MACOM Technology Solutions Holdings, Inc. (“MACOM”, the “Company”, “us”, “we” or “our”) for the periods presented. We prepare our interim financial information using the same accounting principles we use for our annual audited consolidated financial statements. Certain information and note disclosures normally included in the annual audited consolidated financial statements have been condensed or omitted in accordance with prescribed SEC rules. We believe that the disclosures made in our condensed consolidated financial statements and the accompanying notes are adequate to make the information presented not misleading.
The consolidated balance sheet at September 30, 2016 is as reported in our audited consolidated financial statements as of that date. Our accounting policies are described in the notes to our September 30, 2016 consolidated financial statements, which were included in our Annual Report on Form 10-K for our fiscal year ended September 30, 2016 filed with the SEC on November 17, 2016 . We recommend that the financial statements included in this Quarterly Report on Form 10-Q be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for our fiscal year ended September 30, 2016 .
Principles of Consolidation— We have one reportable segment, semiconductors and modules. The accompanying consolidated financial statements include our accounts and the accounts of our majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
We have a 52 or 53-week fiscal year ending on the Friday closest to the last day of September. The fiscal years 2017 and 2016 include 52 weeks. To offset the effect of holidays, for fiscal years in which there are 53 weeks, we include the extra week arising in our fiscal years in the first quarter.
  Use of Estimates —The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities during the reporting periods, the reported amounts of revenue and expenses during the reporting periods, and the disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, we base estimates and assumptions on historical experience, currently available information and various other factors that management believes to be reasonable under the circumstances. Actual results may differ materially from these estimates and assumptions.
Recent Accounting Pronouncements —Our Recent Accounting Pronouncements are described in the notes to our September 30, 2016 consolidated financial statements, which were included in our Annual Report on Form 10-K for our fiscal year ended September 30, 2016 .
In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments , which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers will now recognize measurement-period adjustments during the period in which they determine the amount of the adjustment. This ASU is effective for annual and interim reporting periods beginning after December 15, 2015, and should be applied prospectively to adjustments for provisional amounts that occur after the effective date. The adoption of this guidance did not have a material impact on our consolidated financial statements.

6



2. ACQUISITIONS
Acquisition of Applied Micro Circuits Corporation— On January 26, 2017, we completed the acquisition of Applied Micro Circuits Corporation (“AppliedMicro”), a global provider of silicon solutions for next-generation cloud infrastructure and Cloud Data Centers, as well as connectivity products for edge, metro and long-haul communications equipment (the “AppliedMicro Acquisition”). We acquired AppliedMicro in order to expand our business in enterprise and Cloud Data Center applications. In connection with the AppliedMicro Acquisition, we acquired all of the outstanding common stock of AppliedMicro for total consideration of $695.4 million , which included cash paid of $287.1 million , less $56.8 million of cash acquired, and equity issued at a fair value of $465.1 million . In conjunction with the equity issued, we granted vested out-of-money stock options and unvested restricted stock units to replace outstanding vested out-of-money stock options and unvested restricted stock units of AppliedMicro. The total fair value of granted vested out-of-money stock options and unvested restricted stock units was $14.5 million , of which $9.3 million was attributable to pre-combination service and was included in the total consideration transferred. We funded the AppliedMicro Acquisition with cash on hand and short term investments. For the three and nine months ended June 30, 2017 , we recorded transaction costs of $0.1 million and $11.9 million , respectively. We recorded transaction costs related to the acquisition in selling, general and administrative expense, except for $ 1.0 million related to equity issuance costs which was recorded to additional paid in capital. The AppliedMicro Acquisition was accounted for as a stock purchase and the operations of AppliedMicro have been included in our consolidated financial statements since the date of acquisition.
We recognized the AppliedMicro assets acquired and liabilities assumed based upon the fair value of such assets and liabilities measured as of the date of acquisition. The aggregate purchase price for AppliedMicro has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The excess of the purchase price over the fair value of the acquired net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, none of which will be tax deductible.
The purchase accounting is preliminary and subject to completion including certain fair value measurements, particularly the finalization of the valuation assessment of the acquired tangible and intangible assets. The adjustments arising from the completion of the outstanding matters may materially affect the preliminary purchase accounting.
In connection with the acquisition of AppliedMicro, we entered into a plan to divest a portion of AppliedMicro's business specifically related to its compute business (the "Compute business"). Accordingly, these assets and liabilities are accounted for as discontinued operations and classified as assets and liabilities held for sale.
The following table summarizes the total estimated acquisition consideration (in thousands):
Cash consideration paid to AppliedMicro common stockholders
$
287,060

Common stock issued (9,544,125 shares of our common stock at $47.53 per share)
453,632

Equity consideration for vested "in the money" stock options and unvested restricted stock units
2,143

Fair value of the replacement equity awards attributable to pre-acquisition service
9,307

Total consideration paid, excluding cash acquired
$
752,142


7



The preliminary allocation of purchase price as of June 30, 2017 is as follows (in thousands):
 
Preliminary Allocation
 
Allocation Adjustments
 
Adjusted Allocation
 
March 31, 2017
 
 
 
June 30, 2017
 
 
 
 
 
 
Current assets
$
70,338

 
$
245

 
$
70,583

Intangible assets
410,348

 

 
410,348

Assets held for sale
32,458

 

 
32,458

Other assets
13,504

 
(84
)
 
13,420

Total assets acquired
526,648

 
161

 
526,809

Liabilities assumed:
 
 
 
 
 
Liabilities held for sale
4,444

 

 
4,444

Other liabilities
17,890

 
286

 
18,176

Total liabilities assumed
22,334

 
286

 
22,620

Net assets acquired
504,314

 
(125
)
 
504,189

Consideration:
 
 
 
 
 
Cash paid upon closing
230,298

 

 
230,298

Common stock issued
455,775

 

 
455,775

Equity instruments issued
9,307

 

 
9,307

Total consideration
$
695,380

 
$

 
$
695,380

Goodwill
$
191,066

 
$
125

 
$
191,191

The components of the acquired intangible assets were as follows (in thousands):
 
Included In Assets Held For Sale
Included In Retained Business
 
Useful Lives (Years)
Developed technology
$
9,600

$
78,448

 
7 years
Customer relationships

331,900

 
14 years
 
$
9,600

$
410,348

 
 
The overall weighted-average life of the identified intangible assets acquired in the AppliedMicro Acquisition is estimated to be 12.7 years and the assets are being amortized over their estimated useful lives based upon the pattern over which we expect to receive the economic benefit from these assets.
The following is a summary of AppliedMicro revenue and earnings included in our accompanying condensed consolidated statements of operations for the three and nine months ended June 30, 2017 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2017
 
June 30, 2017
Revenue
$
42,019

 
$
78,464

Loss from continuing operations
(3,744
)
 
(34,049
)
Loss from discontinued operations
(15,574
)
 
(32,004
)

8



The pro forma statements of operations data for the three and nine months ended June 30, 2017 and July 1, 2016 , below, give effect to the AppliedMicro Acquisition, described above, as if it had occurred at October 2, 2015. These amounts have been calculated after applying our accounting policies and adjusting the results of AppliedMicro to reflect; transaction costs, retention compensation expense, the impact of the step-up to the value of acquired inventory, as well as the additional intangible amortization that would have been charged assuming the fair value adjustments had been applied and incurred since October 2, 2015. This pro forma data is presented for informational purposes only and does not purport to be indicative of our future results of operations.
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2017
 
July 1, 2016
 
June 30, 2017
 
July 1, 2016
Revenue
$
194,555

 
$
183,291

 
$
589,347

 
$
513,214

Loss from continuing operations
(6,266
)
 
24,611

 
(90,809
)
 
(61,856
)
Loss from discontinued operations
(13,700
)
 
(19,571
)
 
(33,015
)
 
(55,336
)
Acquisition of FiBest Limited— On December 9, 2015, we completed the acquisition of FiBest Limited (“FiBest”) a Japan-based merchant market component supplier of optical sub-assemblies (“FiBest Acquisition”). We acquired FiBest to expand our position in optical networking components. In connection with the FiBest Acquisition, all of the outstanding equity interests (including outstanding options) of FiBest were exchanged for aggregate consideration of $59.1 million including cash of $47.5 million and assumed debt of $11.6 million . We funded the FiBest Acquisition with cash on hand. There were no transaction costs recorded in the nine months ended June 30, 2017 . For the nine months ended July 1, 2016 we recorded transaction costs of $2.7 million as selling, general and administrative expenses related to this acquisition. The FiBest Acquisition was accounted for as a stock purchase and the operations of FiBest have been included in our consolidated financial statements since the date of acquisition.
We recognized the FiBest assets acquired and liabilities assumed based upon the fair value of such assets and liabilities measured as of the date of acquisition. The aggregate purchase price for FiBest has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the acquired net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, none of which is tax deductible.
During the fiscal quarter ended December 30, 2016, we recorded an adjustment of $0.2 million primarily related to other liabilities and an adjustment of the deferred tax liability associated with the FiBest Acquisition. We finalized our allocation of purchase price during the fiscal quarter ended December 30, 2016. The final allocation of purchase price as of December 30, 2016, is as follows (in thousands):
 
Preliminary Allocation
as of September 30, 2016
 
Allocation Adjustments
 
Final Allocation
 
 
 
 
 
 
Current assets
$
10,445

 
$

 
$
10,445

Intangible assets
45,650

 

 
45,650

Other assets
3,317

 

 
3,317

Total assets acquired
59,412

 

 
59,412

Liabilities assumed:
 
 
 
 
 
Debt
11,627

 

 
11,627

Deferred income taxes
11,658

 
(106
)
 
11,552

Other liabilities
3,968

 
326

 
4,294

Total liabilities assumed
27,253

 
220

 
27,473

Net assets acquired
32,159

 
(220
)
 
31,939

Consideration:
 
 
 
 
 
Cash paid upon closing, net of cash acquired
47,517

 

 
47,517

Goodwill
$
15,358

 
$
220

 
$
15,578


9



The components of the acquired intangible assets were as follows (in thousands):
 
Amount
 
Useful Lives (Years)
Developed technology
$
9,400

 
7
Customer relationships
36,250

 
10
 
$
45,650

 
 
The overall weighted-average life of the identified intangible assets acquired in the FiBest Acquisition is estimated to be 9.4 years and the assets are being amortized over their estimated useful lives based upon the pattern over which we expect to receive the economic benefit from these assets.
The following is a summary of FiBest revenue and earnings included in our accompanying condensed consolidated statements of operations for the three and nine months ended July 1, 2016 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
July 1, 2016
 
July 1, 2016
Revenue
$
10,191

 
$
21,296

Loss before income taxes
(1,150
)
 
(3,717
)
The pro forma statements of operations data for the three and nine months ended July 1, 2016 , below, give effect to the FiBest Acquisition, described above, as if it had occurred at October 4, 2014. These amounts have been calculated after applying our accounting policies and adjusting the results of FiBest to reflect; transaction costs, retention compensation expense, the impact of the step-up to the value of acquired inventory, as well as the additional intangible amortization that would have been charged assuming the fair value adjustments had been applied and incurred since October 4, 2014. This pro forma data is presented for informational purposes only and does not purport to be indicative of our future results of operations.
 
Three Months Ended
 
Nine Months Ended
 
July 1, 2016
 
July 1, 2016
Revenue
$
142,288

 
$
399,267

Net income (loss)
24,276

 
(2,509
)
Acquisition of Aeroflex/Metelics Inc.— On December 14, 2015, we acquired Aeroflex/Metelics, Inc. (“Metelics”), a diode supplier for aggregate cash consideration of $38.0 million , subject to customary working capital and other adjustments (“Metelics Acquisition”). We acquired Metelics to expand our diode business. We funded the acquisition with cash on hand. The Metelics Acquisition was accounted for as a stock purchase and the operations of Metelics have been included in our consolidated financial statements since the date of acquisition. There were no transaction costs recorded in the nine months ended June 30, 2017 . For the nine months ended July 1, 2016 , we recorded transaction costs of $0.5 million as selling, general and administrative expenses related to this acquisition.
We recognized the Metelics assets acquired and liabilities assumed based upon the fair value of such assets and liabilities measured as of the date of acquisition. The aggregate purchase price for Metelics has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the acquired net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, which is tax deductible due to a Section 338(h)(10) election.

10



We finalized our allocation of purchase price during the fiscal quarter ended December 30, 2016. The final allocation of purchase price as of December 30, 2016, is as follows (in thousands):
 
Preliminary Allocation as of September 30, 2016
 
Allocation Adjustments
 
Final Allocation
 
 
 
 
 
 
Current assets
$
12,614

 
$

 
$
12,614

Intangible assets
20,900

 

 
20,900

Other assets
3,089

 

 
3,089

Total assets acquired
36,603

 

 
36,603

Liabilities assumed:
 
 
 
 
 
Other liabilities
7,201

 

 
7,201

Total liabilities assumed
7,201

 

 
7,201

Net assets acquired
29,402

 

 
29,402

Consideration:
 
 
 
 
 
Cash paid upon closing, net of cash acquired
37,125

 

 
37,125

Goodwill
$
7,723

 
$

 
$
7,723

The components of the acquired intangible assets were as follows (in thousands):
 
Amount
 
Useful Lives (Years)
Developed technology
$
1,000

 
7
Customer relationships
19,900

 
10
 
$
20,900

 
 
The overall weighted-average life of the identified intangible assets acquired in the Metelics Acquisition is estimated to be 9.9 years and the assets are being amortized over their estimated useful lives based upon the pattern over which we expect to receive the economic benefit from these assets.
The following is a summary of Metelics revenue and earnings included in our accompanying condensed consolidated statements of operations for the three and nine months ended July 1, 2016 (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
July 1, 2016
 
July 1, 2016
Revenue
$
9,861

 
$
22,113

Income before income taxes
596

 
422

The pro forma statements of operations data for the three and nine months ended July 1, 2016 , below, give effect to the Metelics Acquisition, described above, as if it had occurred at October 4, 2014. These amounts have been calculated after applying our accounting policies and adjusting the results of Metelics to reflect the transaction costs, the impact of the step-up to the value of acquired inventory, as well as, the additional intangible amortization that would have been charged assuming the fair value adjustments had been applied and incurred since October 4, 2014. This pro forma data is presented for informational purposes only and does not purport to be indicative of our future results of operations.
 
Three Months Ended
 
Nine Months Ended
 
July 1, 2016
 
July 1, 2016
Revenue
$
142,288

 
$
400,477

Net income (loss)
22,182

 
(3,521
)

11



3. DISCONTINUED OPERATIONS
In connection with the acquisition of AppliedMicro, we announced a plan to divest its Compute business. As of June 30, 2017 , the Compute business is being actively marketed, negotiations are preliminary and we expect to complete any such divestment within twelve months from the date of acquisition. We are accounting for the business as a discontinued operation.
In August 2015, we sold our automotive business (the "Automotive Business") to Autoliv ASP Inc. (“Autoliv”), as the Automotive business was not consistent with our long-term strategic vision from both a growth and profitability perspective. The agreed consideration included $82.1 million in cash paid at closing and $18.0 million payable in eighteen months pending resolution of any contingencies as part of an indemnification agreement, plus the opportunity to receive up to an additional $30.0 million in cash based on achievement of revenue-based earnout targets through fiscal year 2019.  Additionally, we entered into a consulting agreement pursuant to which we may provide Autoliv with certain non-design advisory services for a period of two years following the closing of the transaction for up to $15.0 million in cash (the "Consulting Agreement").
During the fiscal quarter ended March 31, 2017, we received $18.0 million , the full amount of the indemnification escrow. The remainder of the consideration to be received from Autoliv, if any, including any additional amounts related to the Consulting Agreement, will be accounted for in discontinued operations when the contingencies are finalized and the proceeds, if any, become realizable.
Other income recorded during the three and nine months ended June 30, 2017 and July 1, 2016 from the Automotive business related to the Consulting Agreement.
The accompanying consolidated statements of operations includes the following operating results related to these discontinued operations (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30, 2017
 
July 1, 2016
 
June 30, 2017
 
July 1, 2016
Revenue (1)
 
$
35

 
$

 
$
294

 
$

Cost of revenue (1)
 
(278
)
 

 
1,342

 

Gross profit
 
313

 

 
(1,048
)
 

Operating expenses:
 
 
 
 
 
 
 
 
Research and development (1)
 
10,611

 

 
18,936

 

Selling, general and administrative (1)
 
5,277

 

 
12,021

 

Total operating expenses
 
15,888

 

 
30,957

 

Income from operations
 
(15,575
)
 

 
(32,005
)
 

Other income (2)
 
1,875

 
1,875

 
5,625

 
5,625

Gain on sale (2)
 

 

 
18,022

 
308

Income before income taxes
 
(13,700
)
 
1,875

 
(8,358
)
 
5,933

Income tax provision
 

 
676

 

 
2,139

Income from discontinued operations
 
$
(13,700
)
 
$
1,199

 
$
(8,358
)
 
$
3,794

 
 
 
 
 
 
 
 
 
Cash flow from operating activities
 
(12,312
)
 

 
(41,384
)
 

Cash flow from investing activities
 
1,875

 

 
23,645

 
3,750

Cash flow from financing activities
 

 

 

 

(1) Amounts are associated with the Compute business.
(2) Amounts are associated with the Automotive business.
For the fiscal quarter ended June 30, 2017, we recorded assets held for sale of $31.5 million , which included inventory of $1.0 million , property and equipment, goodwill and intangibles of $28.2 million and other assets of $2.3 million . During the same period, liabilities held for sale amounted to $10.7 million , which included accounts payable of $1.8 million and other accrued liabilities of $8.9 million .

12



4. INVESTMENTS
All investments are short term in nature and are invested in corporate bonds, restricted money market funds, commercial paper and agency bonds, and are classified as available-for-sale. Money market funds include restricted investments in mutual funds acquired in connection with the acquisition of AppliedMicro, which are expected to be liquidated during our fiscal quarter ending September 29, 2017. The amortized cost, gross unrealized holding gains or losses, and fair value of our investments by major investment type as of June 30, 2017 and September 30, 2016 are summarized in the tables below (in thousands):
 
June 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Holding Gains
  
Gross
Unrealized
Holding Losses
 
Aggregate Fair
Value
 
 
 
 
  
 
 
 
Corporate bonds
$
19,956

  
$
4

  
$
(113
)
 
$
19,847

Commercial paper
55,784

 
2

 
(66
)
 
55,720

Agency bonds
3,284

  

  
(23
)
 
3,261

Money market funds
2,813

 

 

 
2,813

Total investments
$
81,837

  
$
6

 
$
(202
)
 
$
81,641

 
September 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Holding Gains
  
Gross
Unrealized
Holding Losses
 
Aggregate Fair
Value
 
 
 
 
  
 
 
 
Corporate bonds
$
14,894

  
$
9

  
$
(103
)
 
$
14,800

Commercial paper
2,978

 

 
(4
)
 
2,974

Agency bonds
6,004

  
1

  
(3
)
 
6,002

Total investments
$
23,876

  
$
10

 
$
(110
)
 
$
23,776


The contractual maturities of investments were as follows (in thousands):
 
 
June 30, 2017
 
September 30, 2016
Less than 1 year
$
58,533

  
$
8,976

Over 1 year
23,108

  
14,800

Total investments
$
81,641

  
$
23,776

Available-for-sale investments are reported at fair value and as such, their associated unrealized gains and losses are reported as a separate component of stockholders’ equity within accumulated other comprehensive loss.
5. FAIR VALUE
We group our financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1  - Quoted prices in active markets for identical assets or liabilities.  
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-driven valuations in which all significant inputs are observable or can be derived principally from, or corroborated with, observable market data.
Level 3  - Fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including assumptions and judgments made by us.
Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
We measure certain assets and liabilities at fair value on a recurring basis such as our financial instruments and derivatives. There have been no transfers between Level 1, 2 or 3 assets or liabilities during the three and nine months ended June 30, 2017 .

13



Money market funds are actively traded and consist of highly liquid investments with original maturities of 90 days or less . They are measured at their net asset value and classified as Level 1 assets. Corporate and agency bonds and commercial paper are categorized as Level 2 assets except where sufficient quoted prices exist in active markets, in which case such securities are categorized as Level 1 assets. These securities are valued using third-party pricing services. These services may use, for example, model-based pricing methods that utilize observable market data as inputs. We generally use quoted prices for recent trading activity of assets with similar characteristics to the debt security or bond being valued. The securities and bonds priced using such methods are generally classified as Level 2 assets. Broker dealer bids or quotes on securities with similar characteristics may also be used.
Assets and liabilities measured at fair value on a recurring basis consist of the following (in thousands):
 
June 30, 2017
 
Fair Value
 
Active Markets for Identical Assets (Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
Assets
 
 
 
 
 
 
 
Money market funds
$
2,881

 
$
2,881

 
$

 
$

Commercial paper
55,720

 

 
55,720

 

Agency bonds
3,261

 

 
3,261

 

Corporate bonds
19,847

 

 
19,847

 

Total assets measured at fair value
$
81,709

 
$
2,881

 
$
78,828

 
$

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
2,195

 
$

 
$

 
$
2,195

Common stock warrant liability
54,734

 

 

 
54,734

Total liabilities measured at fair value
$
56,929

 
$

 
$

 
$
56,929

 
September 30, 2016
 
Fair Value
 
Active Markets for Identical Assets (Level 1)
 
Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
Assets
 
 
 
 
 
 
 
Money market funds
$
1,172

 
$
1,172

 
$

 
$

Commercial paper
102,928

 

 
102,928

 

US treasuries and agency bonds
6,002

 

 
6,002

 

Corporate bonds
14,800

 

 
14,800

 

Total assets measured at fair value
$
124,902

 
$
1,172

 
$
123,730

 
$

Liabilities
 
 
 
 
 
 
 
Contingent consideration
$
848

 
$

 
$

 
$
848

Common stock warrant liability
38,253

 

 

 
38,253

Total liabilities measured at fair value
$
39,101

 
$

 
$

 
$
39,101

As of June 30, 2017 and September 30, 2016 , the fair value of the common stock warrants has been estimated using a Black-Scholes option pricing model.

14



The quantitative information utilized in the fair value calculation of our Level 3 liabilities is as follows:
 
 
 
 
 
Inputs
Liabilities
Valuation Technique
 
Unobservable Input
 
June 30, 2017
 
September 30, 2016
Contingent consideration
Discounted cash flow
 
Discount rate
 
3.5% - 10.7%
 
12.9%
 
 
 
Probability of achievement
 
70% - 100%
 
75% - 100%
 
 
 
Timing of cash flows
 
5 - 7 months
 
1 year
 
 
 
 
 
 
 
 
Warrant liability
Black-Scholes model
 
Volatility
 
41.8%
 
43.2%
 
 
 
Discount rate
 
1.55%
 
1.14%
 
 
 
Expected life
 
3.48 years
 
4.23 years
 
 
 
Exercise price
 
$14.05
 
$14.05
The fair values of the contingent consideration liabilities were estimated based upon a risk-adjusted present value of the probability-weighted expected payments by us. Specifically, we considered base, upside and downside scenarios for the operating metrics upon which the contingent payments are to be based. Probabilities were assigned to each scenario and the probability weighted payments were discounted to present value using risk-adjusted discount rates.
The changes in liabilities with inputs classified within Level 3 of the fair value hierarchy consist of the following (in thousands):
 
September 30,
2016
 
Net Realized/Unrealized Losses Included in Earnings
 
Purchases
and
Issuances
 
Sales and
Settlements
 
June 30,
2017
Contingent consideration
$
848

 
$
46

 
$
1,701

 
$
(400
)
 
$
2,195

Common stock warrant liability
$
38,253

 
$
16,481

 
$

 
$

 
$
54,734

 
October 2,
2015
 
Net Realized/Unrealized Losses Included in Earnings
 
Purchases
and
Issuances
 
Sales and
Settlements
 
July 1,
2016
Contingent consideration
$
1,150

 
$
66

 
$

 
$
(400
)
 
$
816

Common stock warrant liability
$
21,822

 
$
3,741

 
$

 
$

 
$
25,563

6. INVENTORIES
Inventories consist of the following (in thousands):
 
June 30,
2017
 
September 30,
2016
Raw materials
$
72,183

 
$
67,378

Work-in-process
12,962

 
9,157

Finished goods
35,200

 
38,400

Total
$
120,345

 
$
114,935


15



7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
 
June 30,
2017
 
September 30,
2016
Land, buildings and improvements
$
17,642

 
$
12,572

Construction in process
16,813

 
9,415

Machinery and equipment
152,618

 
129,639

Leasehold improvements
12,219

 
12,152

Furniture and fixtures
2,075

 
1,469

Computer equipment and software
17,864

 
12,954

Total property and equipment
$
219,231

 
$
178,201

Less accumulated depreciation and amortization
(97,818
)
 
(79,034
)
Property and equipment, net
$
121,413

 
$
99,167

Depreciation and amortization expense related to property, plant and equipment for the three and nine months ended June 30, 2017 was $6.5 million and $19.7 million , respectively. Depreciation and amortization expense related to property, plant and equipment for the three and nine months ended July 1, 2016 was $5.7 million and $15.2 million , respectively.
8. DEBT
On May 8, 2014, we entered into a credit agreement (“Credit Agreement”) with a syndicate of lenders that provided for term loans in an aggregate principal amount of $350.0 million , which were scheduled to mature in May 2021 (“Initial Term Loans”) and a revolving credit facility of $100.0 million initially (as increased by the amendments described below, “Revolving Facility”). In February 2015, we executed an amendment to the Credit Agreement that increased our aggregate borrowing capacity under the Revolving Facility to $130 million . The Initial Term Loans were issued with an original issue discount of 0.75% , which is being amortized over the term of the Initial Term Loans using the straight-line method, which approximates the effective interest rate method.
On August 31, 2016, we entered into an amendment (“2016 Incremental Term Loan Amendment”) to our Credit Agreement which provided for incremental term loans in an aggregate principal amount of $250 million , which were scheduled to mature in May 2021 (“2016 Incremental Term Loans”). The terms of the 2016 Incremental Term Loans were identical to the terms of the Initial Term Loans, other than with respect to upfront fees, original issue discount and arrangement, structuring or similar fees payable in connection therewith. The 2016 Incremental Term Loans were issued with an original issue discount of 0.95% , which is being amortized over the term of the 2016 Incremental Term Loans using the straight-line method, which approximates the effective interest rate method.
On March 10, 2017, we entered into multiple amendments to our Credit Agreement (the "March 2017 Amendments"), which consisted of (i) the Second Incremental Amendment, by and among MACOM, Barclays Bank PLC and Goldman Sachs Bank USA, as administrative agent, (ii) the Refinancing Amendment, by and among MACOM, the lenders party thereto and Goldman Sachs Bank USA, as administrative agent and (iii) Amendment No. 4 to the Credit Agreement, by and among MACOM, the revolving credit lenders and Goldman Sachs Bank USA, as administrative agent. Pursuant to the March 2017 Amendments, we increased the revolving credit commitments available under our revolving credit facility by $30.0 million to $160.0 million . No amounts were drawn under the Revolving Facility on the closing date of the March 2017 Amendments or as of June 30, 2017 . In addition, pursuant to the March 2017 Amendments, our existing term loans were refinanced at a reduced interest rate.
Further, pursuant to the March 2017 Amendments, the Credit Agreement was amended to provide that the financial covenant under the Revolving Facility would only be tested if, as of the last date of any fiscal quarter, the aggregate amount outstanding under the Revolving Facility (other than with respect to (a) undrawn letters of credit in an amount not to exceed $5.0 million and (b) letters of credit that have been cash collateralized pursuant to the Credit Agreement) exceeds 35% of the revolving credit commitments under the Revolving Facility. Prior to the March 2017 Amendments, the threshold for testing the financial covenant was set at 25% of the revolving credit commitments under the Revolving Facility.
On May 19, 2017, we entered into two amendments to our Credit Agreement (the "May 2017 Amendments") which consisted of (i) the Second Refinancing Amendment, among MACOM, Morgan Stanley Senior Funding, Inc. and the other term lenders party thereto and Goldman Sachs Bank USA, as administrative agent (the "Second Refinancing Amendment"), and (ii) the Second Incremental Term Loan Amendment, among MACOM, Morgan Stanley Senior Funding, Inc. and the other lenders party thereto and Goldman Sachs Bank USA, as administrative agent (the "Second Incremental Term Loan Amendment").

16



Pursuant to the Second Refinancing Amendment, our existing term loans of $588.5 million were refinanced with a new tranche of term loans. The refinanced term loans will mature in May 2024 and bear interest at: (i) for LIBOR loans for any interest period, a rate per annum equal to the LIBOR rate as determined by the administrative agent, plus an applicable margin of 2.25% ; and (ii) for base rate loans, a rate per annum equal to the greater of (a) the prime rate quoted in the print edition of the Wall Street Journal, Money Rates Section, (b) the federal funds rate plus one-half of 1.00% and (c) the LIBOR rate applicable to a one-month interest period plus 1.00% (but, in each case, not less than 1.00% ), plus an applicable margin of 1.25% . The effective interest rate on our term loans was 3.5% as of June 30, 2017 .
Pursuant to the Second Incremental Term Loan Amendment, we borrowed an additional $100.0 million of incremental term loans (the "2017 Incremental Term Loans", together with the Initial Term Loans and the 2016 Incremental Term Loans, "Term Loans") on the same terms as the new tranche of term loans incurred pursuant to the Second Refinancing Amendment. The 2017 Incremental Term Loans and the new tranche of term B loans were issued with an original issue discount of 0.50% , which is being amortized over the term of the Second Refinancing Amendment using the straight-line method, which approximates the effective interest rate method.
We incurred $8.7 million in fees for the issuance of the Credit Agreement in May 2014, and $3.2 million in fees for the issuance of the 2016 Incremental Term Loan Amendment in August 2016, which were initially recorded as deferred financing costs and are being amortized over the initial life of the Credit Agreement as interest expense. In March 2017, we incurred an additional $1.0 million in fees for the issuance of the March 2017 Amendments, and in May 2017, we incurred an additional $11.1 million in fees for the issuance of the May 2017 Amendments. In connection with the March 2017 Amendments and the May 2017 Amendments, we determined that $0.9 million and $1.1 million of deferred costs previously capitalized should be expensed during our second and third fiscal quarters, respectively, as a loss on extinguishment of debt related to syndicated lenders whose debt was extinguished. As of June 30, 2017 , approximately $14.3 million of deferred financing costs remain unamortized, of which $13.0 million is related to the Term Loans and is recorded as a direct reduction of the recognized debt liabilities in our accompanying consolidated balance sheet, and $1.3 million is related to the Revolving Facility and is recorded in other assets in our accompanying consolidated balance sheet.
The Term Loans are secured by a first priority lien on substantially all of our assets and provide that we must comply with certain financial and non-financial covenants. As of June 30, 2017 , we had $688.5 million of outstanding Term Loan borrowings under the Credit Agreement and $160.0 million of borrowing capacity under our Revolving Facility.
As of June 30, 2017 , the following remained outstanding on the Term Loans (in thousands):
Principal balance
$
688,462

Unamortized discount
(6,075
)
Total term loans
$
682,387

Current portion
7,071

Long-term, less current portion
$
675,316

As of June 30, 2017 , the minimum principal payments under the Term Loans in future fiscal years were as follows (in thousands):
2017 (rest of fiscal year)
$
1,768

2018
7,071

2019
7,071

2020
7,071

2021
7,071

Thereafter
658,410

Total
$
688,462

The fair value of the Term Loans was estimated to be approximately $697.9 million as of June 30, 2017 and was determined using Level 2 inputs, including a quoted rate from a bank.

17



9. CAPITAL LEASE AND FINANCING OBLIGATIONS
Corporate Facility Financing Obligation
On May 26, 2016, we entered into a Purchase and Sale Agreement (“Purchase Agreement”) with Calare Properties, Inc., a Delaware corporation (together with its affiliates, the “Buyer”) for the sale and subsequent leaseback of our corporate headquarters, located at 100 Chelmsford Street, Lowell, Massachusetts. The transactions contemplated by the Purchase Agreement closed on December 28, 2016, at which time we also entered into three lease agreements with the Buyer including: (1) a 20 -year leaseback of the facility located at 100 Chelmsford Street (the “100 Chelmsford Lease”), (2) a 20 -year build-to-suit lease arrangement for the construction and subsequent lease back of a new facility to be located at 144 Chelmsford Street (the “144 Chelmsford Lease”), and (3) a 14 -year building lease renewal of an adjacent facility at 121 Hale Street (the “121 Hale Lease”, and together with the 100 Chelmsford Lease and the 144 Chelmsford Lease, the “Leases”).
Because the transactions contemplated by the Purchase Agreement and the related Leases were negotiated and consummated at the same time and in contemplation of one another to achieve the same commercial objective, the transactions are accounted for by us as a single unit of accounting. In addition, the Leases were determined to represent a failed sale-leaseback due to our continuing involvement in the properties in the form of non-recourse financing. As a result, the Leases are accounted for under the financing method and we will be the deemed accounting owner under the arrangement, including the assets to be constructed under the 144 Chelmsford Lease. We will continue to recognize the existing building and improvements sold under the Purchase Agreement, capitalize the 121 Hale Street building as well as the assets constructed under the Leases, and depreciate the assets over the shorter of their estimated useful lives or the lease terms. The sale proceeds from the Purchase Agreement of $8.2 million (which includes $4.2 million in cash and $4.0 million in construction allowances) and the fair value of the 121 Hale Street building of $4.0 million were recognized as a financing obligation on our balance sheet and are being amortized over the 20 -year lease term based on the minimum lease payments required under the Leases and our incremental borrowing rate. Future construction costs funded by the Buyer under the 144 Chelmsford Lease will be recognized as additional financing obligations on our balance sheet as incurred, and will be amortized over the 20 -year lease term based on the minimum lease payments required under the Leases and our incremental borrowing rate.
As a result of the failed sale-leaseback accounting, we calculated a financing obligation as of the December 28, 2016 inception of the lease based on the future minimum lease payments discounted at 8.5% . The discount rate represents the estimated incremental borrowing rate over the lease term of 20 -years. The minimum lease payments are recorded as interest expense and in part as a payment of principal reducing the financing obligation. The real property assets in the transaction remain on the consolidated balance sheets and continue to be depreciated over the remaining useful lives. As of June 30, 2017 , approximately $13.5 million of the financing obligation was outstanding associated with the Leases.
Acquired Capital Leases
In connection with the FiBest Acquisition in December 2015 and the acquisition of BinOptics Corporation (“BinOptics Acquisition”) in December 2014 we assumed certain capital lease obligations, of which approximately  $2.5 million was outstanding as of  June 30, 2017 .
As of June 30, 2017 , future minimum payments under capital lease obligations and financing obligations related to the Leases were as follows (in thousands):
Fiscal year ending:
 
Amount
2017
 
$
549

2018
 
1,897

2019
 
1,793

2020
 
1,620

2021
 
1,486

Thereafter
 
20,541

Total minimum capital lease obligation payments
 
$
27,886


18



10. INTANGIBLE ASSETS
Amortization expense related to intangible assets is as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
June 30,
2017
 
July 1,
2016
 
June 30,
2017
 
July 1,
2016
Cost of revenue
$
8,416

 
$
6,440

 
$
21,694

 
$
20,249

Selling, general and administrative
10,833

 
6,415

 
24,463

 
17,142

Total
$
19,249

 
$
12,855

 
$
46,157

 
$
37,391

    
Intangible assets consist of the following (in thousands):
 
June 30,
2017
 
September 30,
2016
Acquired technology
$
242,926

 
$
165,397

Customer relationships
536,070

 
207,674

In-process research and development
8,000

 
8,000

Trade name
3,400

 
3,400

Total
$
790,396

 
$
384,471

Less accumulated amortization
(171,026
)
 
(124,869
)
Intangible assets — net
$
619,370

 
$
259,602

A summary of the activity in intangible assets and goodwill follows (in thousands):
 
Intangible Assets
 
 
 
Total Intangible Assets
 
Acquired
Technology
 
Customer
Relationships
 
In-Process Research and Development
 
Trade Name
 
Goodwill
Balance at September 30, 2016
$
384,471

 
$
165,397

 
$
207,674

 
$
8,000

 
$
3,400

 
$
120,024

Acquired
410,581

 
78,448

 
332,133

 

 

 
194,971

Fair value adjustment

 

 

 

 

 
345

Currency translation adjustment
(4,656
)
 
(919
)
 
(3,737
)
 

 

 
(1,614
)
Balance at June 30, 2017
$
790,396

 
$
242,926

 
$
536,070

 
$
8,000

 
$
3,400

 
$
313,726

As of June 30, 2017 , our estimated amortization of our intangible assets in future fiscal years was as follows (in thousands):
 
2017 Remaining
2018
2019
2020
2021
Thereafter
Total
Amortization expense
$
19,312

80,837

86,097

82,870

74,338

264,516

$
607,970

Our trade name is an indefinite-lived intangible asset. During development, in-process research and development (“IPR&D”) is not subject to amortization and is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value to its carrying amount. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Once an IPR&D project is complete, it becomes a definite long-lived intangible asset and is evaluated for impairment in accordance with our policy for long-lived assets.
Accumulated amortization for acquired technology and customer relationships were $98.2 million and $72.8 million , respectively, as of June 30, 2017 , and $76.7 million and $48.1 million , respectively, as of September 30, 2016 .
11. STOCKHOLDERS' EQUITY
We have authorized 10 million shares of $0.001 par value preferred stock and 300 million shares of $0.001 par value common stock as of June 30, 2017 and September 30, 2016 . The outstanding shares of our common stock as of June 30, 2017 and September 30, 2016 , presented in the accompanying consolidated statements of stockholders’ equity exclude 200 and 3,300 unvested shares of restricted stock awards, respectively, issued as compensation to employees and directors that remained subject to forfeiture.

19



Common Stock Warrants —In March 2012, we issued warrants to purchase 1,281,358 shares of common stock for $14.05 per share. The warrants expire December 21, 2020 , or earlier as per the terms of the agreement, including immediately following consummation of a sale of all or substantially all assets or capital stock or other equity securities, including by merger, consolidation, recapitalization, or similar transactions. We do not currently have sufficient registered and available shares to immediately satisfy a request for registration, if such a request were made. As of June 30, 2017 , no exercise of the warrants had occurred and no request had been made to register the warrants or any underlying securities for resale by the holders.
We are recording the estimated fair values of the warrants as a long-term liability in the accompanying consolidated financial statements with changes in the estimated fair value being recorded in the accompanying statements of operations. See Note 5 - Fair Value for additional information related to the fair value of our warrant liability.
12. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation for basic and diluted net loss per share of common stock (in thousands, except per share data):
 
Three Months Ended
 
Nine Months Ended
 
June 30, 2017
 
July 1, 2016
 
June 30, 2017
 
July 1, 2016
Numerator:
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(13,977
)
 
$
21,353

 
$
(150,414
)
 
$
(7,462
)
(Loss) income from discontinued operations
(13,700
)
 
1,199

 
(8,358
)
 
3,794

Net (loss) income
$
(27,677
)
 
$
22,552

 
$
(158,772
)
 
$
(3,668
)
Warrant liability gain

 
(15,339
)
 

 

Net (loss) income attributable to common stockholders
$
(27,677
)
 
$
7,213

 
$
(158,772
)
 
$
(3,668
)
Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding-basic
64,019

 
53,516

 
59,524

 
53,253

Dilutive effect of options and warrants

 
1,772

 

 

Weighted average common shares outstanding-diluted
$
64,019

 
$
55,288

 
$
59,524

 
$
53,253

(Loss) earnings per share-basic:
 
 
 
 
 
 
 
Continuing operations
$
(0.22
)
 
$
0.40

 
$
(2.53
)
 
$
(0.14
)
Discontinued operations
(0.21
)
 
0.02

 
(0.14
)
 
0.07

Net common stock (loss) income per share-basic
$
(0.43
)
 
$
0.42

 
$
(2.67
)
 
$
(0.07
)
(Loss) earnings per share-diluted:
 
 
 
 
 
 
 
Continuing operations
$
(0.22
)
 
$
0.11

 
$
(2.53
)
 
$
(0.14
)
Discontinued operations
(0.21
)