BUSINESS COMBINATION AND GOODWILL

In March 2017, the Company purchased 100% of a company for $3.7 million. The acquired company produces virtual reality systems for 3D applications. Additional payments of up to $2.0 million may be required if certain future operating performance milestones are met and the selling shareholders remain employed through March 2020. As there is a requirement to remain employed to earn the contingent payments, these contingent payments will be treated as compensation expense. Commencing on the date of acquisition, the Company consolidated the financial results of the acquired company. The identifiable assets acquired and liabilities assumed at the acquisition date have been recognized at fair value.

The allocation of the purchase price is as follows:



Cash and marketable securities	$	2,600
Accounts receivable	490,700
Inventory	768,400
Other identifiable assets	46,800
Order backlog	840,000
Customer relationships	1,000,000
Developed technology	460,000
Trademark portfolio	160,000
Current liabilities	(480,500		)
Net deferred tax liabilities	(1,084,000		)
Goodwill	1,489,000
Total	$	3,693,000

Goodwill represents the recording of the excess of the purchase price over the fair values of the net tangible assets acquired. The values assigned to the acquired assets and liabilities are based on preliminary estimates of fair value available as of the date of this filing and will be adjusted upon completion of final valuations of certain assets and liabilities. Any changes in these fair values could potentially result in an adjustment to the goodwill recorded for this transaction.

The identified intangible assets will be amortized on a straight-line basis over the following lives, in years:



Order backlog	1
Customer relationships	2
Developed technology	2
Trademark portfolio	2

The Company recognized $1.1 million in amortization for the nine month period ended September 30, 2017 related to its intangible assets. In conjunction with the acquisition the Company recorded deferred tax liabilities of approximately $1.0 million associated with the future non-deductible amortization of the intangible assets. These deferred tax liabilities can be used to offset the Company’s net deferred tax assets in future years. The Company reduced the valuation allowance on its net deferred tax assets in the amount of $1.0 million and such reduction was recognized as a benefit for income taxes for the nine month period ended September 30, 2017. Acquisition expenses were approximately $0.2 million and are recorded in selling, general and administration expenses.

The following unaudited supplemental pro forma disclosures are provided for the three and nine month periods ended September 24, 2016 and the nine month period ended September 30, 2017, assuming the acquisition of the company had occurred as of December 26, 2015. All intercompany transactions have been eliminated.



	Three months ended			Nine months ended
	September 24, 2016			September 30, 2017			September 24, 2016
Revenues	$	6,698,701		$	17,081,144		$	17,894,777
Net loss	(7,710,770		)	(23,271,116		)	(18,226,203		)

Since the date of acquisition, the Company recorded revenue and net loss of $1.9 million and $0.1 million, respectively, in the three month period ended September 30, 2017, and for the nine month period ended September 30, 2017 the revenues and net loss from the acquired company were $3.7 million and $0.5 million, respectively.

A rollforward of the Company's goodwill by segment is as follows:



	Kopin		Industrial		Total
Balance, December 31, 2016	$	844,023	$	—	$	844,023
March 2017 acquisition	—		1,488,650		1,488,650
Change due to exchange rate fluctuations	43,904		—		43,904
Balance, September 30, 2017	$	887,927	$	1,488,650	$	2,376,577

The Company has entered into two joint venture agreements and other agreements which are subject to certain closing conditions including government approvals. If the transactions close the Company will contribute certain intellectual property and approximately $8.0 million.