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9. ACQUISITION | 9 Months Ended
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Dec. 31, 2015
Acquisition |
NOTE 9-ACQUISITION | NOTE 9—ACQUISITION On November 23, 2015, the Company acquired all of the outstanding capital stock of privately held MikaMonu Group Ltd. (“MikaMonu”), a development-stage, Israel-based company that specializes in in-place associative computing for markets including big data, computer vision and cyber security. MikaMonu, located in Tel Aviv, held 12 United States patents and a number of pending patent applications. The acquisition was undertaken by the Company in order to gain access to the MikaMonu patents and the potential markets, and new customer base in those markets, that can be served with new products that the Company plans to develop using the MikaMonu patents obtained in the a cquisition. The acquisition has been accounted for as a purchase under authoritative guidance for business combinations. The purchase price of the acquisition has been preliminarily allocated to the intangible assets acquired, with the excess of the purchase price over the fair value of assets acquired recorded as goodwill. The Company will perform a goodwill impairment test in February of each fiscal year. The results of operations of MikaMonu and the estimated fair value of the assets acquired were included in the Company’s condensed consolidated financial statements beginning November 23, 2015. Consideration Under the terms of the acquisition agreement, the Company paid the former MikaMonu shareholders initial cash consideration of approximately $5.0 million at the closing on November 23, 2015. Approximately $484,000 of the initial payment was deposited in escrow to provide a fund for potential future indemnification claims by the Company. This amount is included in other assets on the Condensed Consolidated Balance Sheet at December 31, 2015. The Company is also required to pay the former MikaMonu shareholders future contingent consideration consisting of retention payments and “earnout” payments, as described below. The Company will make cash retention payments of up to an additional $2.5 million to the three former MikaMonu shareholders in installments over a four-year period, conditioned on the continued employment of Dr. Avidan Akerib, MikaMonu’s co-founder and chief technologist. The retention amount of $2.5 million has been deposited in escrow and is included in other assets on the Consolidated Balance Sheet at December 31, 2015. The Company will also make “earnout” payments to the former MikaMonu shareholders in cash or shares of the Company’s common stock, at the Company’s discretion, during a period of up to ten years following the closing if certain product development milestones and revenue targets for products based on the MikaMonu technology are achieved. Earnout amounts of $750,000 will be payable if certain product development milestones are achieved by December 31, 2017. Additional earnout amounts of $2,750,000 and $4,000,000 will be payable if certain revenue milestones are achieved by January 1, 2021 and January 1, 2022, respectively; and additional payments, up to a maximum of $30 million, equal to 5% of net revenues from the sale of qualifying products in excess of certain thresholds will be made quarterly through December 31, 2025. The portion of the retention payment contingently payable to Dr. Akerib (approximately $1.2 million) will be recorded as compensation expense over the period that his services are provided to the Company. The portion of the retention payment contingently payable to the other former MikaMonu shareholders (approximately $1.3 million) plus the maximum amount of the potential earnout payments totals approximately $38.8 million. The Company has determined that the fair value of this contingent consideration liability was $5.8 million at the acquisition date. This amount is included in other accrued expenses on the Consolidated Balance Sheet at December 31, 2015. The fair value of the contingent consideration liability was determined as of the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of future cash flows, the probability of success (achievement of the various contingent events) and a risk-adjusted discount rate of approximately 14.8% used to adjust the probability-weighted cash flows to their present value. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability will be re-measured at then current fair value with changes recorded in the Consolidated S tatement s of O perations. Changes in any of the inputs may result in material adjustments to the recorded fair value. Acquisition-related costs Acquisition-related costs of approximately $376,000 and $394,000 are included in selling, general and administrative expenses in the Condensed Consolidated Statement s of Operations for the three months and nine months ended December 31, 2015, respectively. Purchase price allocation The allocation of the purchase price to acquired identifiable intangible assets and goodwill was based on their estimated fair values at the date of acquisition. The fair value allocated to patents was $3.5 million and the fair value allocated to goodwill was $8.0 million. The fair value allocated to tangible and identifiable intangible assets and goodwill of MikaMonu acquired on November 23, 2015 was computed as follows (in thousands):
Cash and cash equivalents |  | $ | 1 |
Other receivables |  |  | 54 |
Property and equipment, net |  |  | 10 |
Intangible assets |  |  | 3,500 |
Goodwill |  |  | 8,030 |
Total assets acquired |  |  | 11,595 |
Accrued expenses |  |  | (10) |
Net deferred tax liability |  |  | (821) |
Total liabilities assumed |  |  | (831) |
Fair value of net assets acquired |  | $ | 10,764 |
The deferred tax liability associated with the estimated fair value adjustments of the intangible assets acquired is recorded at an estimated weighted average statutory tax rate in the jurisdictions where the fair value adjustments may occur. Identifiable intangible assets The following table sets forth the components of the identifiable intangible assets acquired in the MikaMonu acquisition, which are being amortized over their estimated useful lives on a straight-line basis:
|  | Fair Value |  | Useful Life |
|  | (in thousands) |  | (in years) |
Patents |  | $ | 3,500 |  | 15 |
Total acquired identifiable intangible assets |  | $ | 3,500 |  |  |
The fair value of patents was determined using relief from royalty approach, which discounted expected future cash flows to present value. The cash flows were discounted at a rate of approximately 14.0%. Prior to the closing of the acquisition, there were no material relationships between the Company and MikaMonu. The following table summarizes total net revenues and net loss of the combined entity had the acquisition of MikaMonu occurred on April 1, 2014 (in thousands, except loss per share data):
|  | Three Months Ended December 31, |  | Nine Months Ended December 31, |
|  | 2015 |  | 2014 |  | 2015 |  | 2014 |
Pro forma net revenues |  | $ | 12,921 |  | $ | 14,227 |  | $ | 40,523 |  | $ | 40,670 |
Pro forma net loss |  | $ | (563) |  | $ | (166) |  | $ | (2,540) |  | $ | (3,229) |
Pro forma net loss per share, basic and diluted |  | $ | (0.02) |  | $ | (0.01) |  | $ | (0.11) |  | $ | (0.13) |
The combined results in the table above have been prepared for comparative purposes only and include acquisition related adjustments for, among other items, the amortization of identifiable intangible assets. Since the acquisition date, the results of MikaMonu have been included in the Company’s condensed consolidated financial statements. The combined results do not purport to be indicative of the results of operations which would have resulted had the acquisition been effected at the beginning of the applicable periods noted above, or the future results of operations of the combined entity.

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