MaxLinear, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Business Combinations

Business Combinations

6 Months Ended

Jun. 30, 2021

Acquisition of the Wi-Fi and Broadband assets business

On July 31, 2020, the Company and certain of its designated subsidiaries completed their acquisition of the Home Gateway Platform Division, which the Company refers to as the Wi-Fi and Broadband assets business, pursuant to an Asset Purchase Agreement with Intel Corporation, or Intel, dated April 5, 2020 (the “Asset Purchase Agreement”), and related agreements. The Company paid cash consideration of $150.0 million for the purchase of certain assets of the Wi-Fi and Broadband assets business, and assumed certain liabilities related to specified employment matters. The transaction was funded with a portion of the net proceeds from a secured incremental term loan with an aggregate principal amount of $175.0 million (Note 8).

The Wi-Fi and Broadband assets business develops a broad portfolio of connected home products, including Wi-Fi, Ethernet and Broadband Gateway Processor SoCs, which enables the Company to strengthen its existing connected home portfolio by bringing together a complete, scalable, and complementary platform of connectivity and access solutions to address its customers’ needs across target end-markets.

The acquired assets and assumed liabilities, together with the employees who joined the Company and its subsidiaries as a result of the transaction, represent a business as defined in ASC 805, Business Combinations. The Company is integrating the acquired assets and rehired employees into the Company’s existing business.

The Asset Purchase Agreement also contains customary representations, warranties and covenants, including indemnification provisions set forth therein. Pursuant to the Purchase Agreement, Intel has retained, and will be obligated to indemnify MaxLinear for, certain liabilities, including but not limited to those relating to the Home Gateway Platform Division for pre-closing taxes and specified employment matters, and MaxLinear has assumed, and will indemnify Intel for, certain liabilities, including but not limited to those relating to the Home Gateway Platform Division and the Transferred Assets for certain pre-closing and post-closing actions, events and periods (including certain product-related liabilities for products sold prior to the Closing for up to a $25.0 million cap), and specified employment matters.

In connection with the transaction, the Company and Intel have entered into as of the closing certain other ancillary agreements, including (i) an intellectual property matters agreement, pursuant to which Intel granted to the Company a license to certain intellectual property rights for use by the Company in connection with the acquired assets and the Company granted back to Intel a license to the intellectual property rights in the acquired assets, (ii) a supply agreement, pursuant to which Intel manufactures and fabricates certain products for the Company that are part of the acquired assets, (iii) an ethernet network controller services agreement, pursuant to which the Company provides Intel with certain development services with respect to certain Intel ethernet network controller products, (iv) a transition services agreement, pursuant to which Intel provided certain services on a transitional basis for up to a 12-month period after the closing, the scope of which included services relating to real estate and facilities, information technology, and supply chain, procurement, sales operations, and engineering support, and (v) a side letter regarding the delayed transfer of certain inventory. Pursuant to the delayed inventory side letter, the Company had control and economic benefits of the inventory, but transfer of the title and possession of the inventory was delayed until the last day that Intel provided services under the transition services agreement.

Acquisition Consideration

The following table summarizes the fair value of purchase price consideration to acquire the Wi-Fi and Broadband assets business (in thousands):


Description	Amount
Fair value of purchase consideration:
Cash	$	150,000

Purchase Price Allocation

The following is an allocation of purchase price as of the July 31, 2020 acquisition closing date based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition (in thousands):


Description	Amount
Fair value of consideration transferred:
Cash	$	150,000

Purchase price allocation:
Inventory	$	67,100
Property and equipment	17,641

Identifiable intangible assets	58,000
Deferred tax assets	457
Accrued expenses	(68)
Accrued price protection liability	(413)
Accrued compensation	(7,916)

Other long-term liabilities	(8,197)
Identifiable net assets acquired	126,604
Goodwill	23,396
Total purchase price	$	150,000

The following is a summary of identifiable intangible assets acquired and the related expected lives for the finite-lived intangible assets (in thousands):


Category	Estimated Life in Years	Fair Value
Finite-lived intangible assets:
Developed technology	7	$	43,200

Customer-related intangible	5	6,800

Product backlog	0.58	800
		50,800
Indefinite-lived intangible assets:
IPR&D	N/A	7,200
Total identifiable intangible assets acquired		$	58,000

Acquisition of NanoSemi, Inc.

On September 9, 2020, the Company completed its acquisition of NanoSemi, Inc. or NanoSemi, pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) with NanoSemi, dated September 9, 2020. The initial closing transaction consideration consisted of $10.0 million in cash and 804,163 shares of MaxLinear’s common stock. In addition, the NanoSemi stockholders will receive $35.0 million in deferred cash payments payable in 2021, and certain NanoSemi stockholders may also receive up to an additional $35.0 million in potential contingent consideration, subject to the acquired business’s satisfying certain financial objectives from July 1, 2020 through December 31, 2022. As of June 30, 2021, the Company has made $27.5 million of $35.0 million in deferred cash payments. The stock consideration was issued in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended. In connection with the acquisition, MaxLinear agreed to provide the NanoSemi stockholders with certain registration rights with respect to the shares of MaxLinear common stock they received in the acquisition.

NanoSemi is an industry-leading provider of intellectual property that utilizes patented machine learning techniques to improve signal integrity and power efficiency in systems-on-chip, or SoCs, application-specific integrated circuits, or ASICs, and field-programmable gate arrays, or FPGAs, used in next-generation communication and artificial intelligence systems. Its technology enables higher throughput connections for 5G, Wi-Fi, and WiGig smartphones and base stations while simultaneously reducing energy consumption.

Acquisition Consideration

The following table summarizes the fair value of purchase price consideration to acquire NanoSemi (in thousands):


Description	Amount
Fair value of purchase consideration:
Cash	$	10,000
Common stock issued(1)	17,080
Deferred payments(2)	34,100
Contingent consideration(3)	—




Total purchase price	$	61,180

_________________

(1) The fair value of common stock issued in the merger is based on 804,163 shares issued on the September 9, 2020 acquisition date at the closing price of the Company’s common stock of $21.24 per share.

(2) The fair value of the deferred payments was determined by discounting to present value payments totaling $35.0 million expected to be made to NanoSemi stockholders throughout 2021.

(3) The fair value of contingent consideration is zero as the applicable financial objectives from July 1, 2020 through December 31, 2022 are not expected to be met based on the Company’s forecast.

Purchase Price Allocation

The following is an allocation of purchase price as of the September 9, 2020 acquisition closing date based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition (in thousands):


Description	Amount











Purchase price allocation:
Accounts receivable	$	175
Prepaid expenses and other current assets	879
Property and equipment	177
Leased right-of-use assets	1,805
Identifiable intangible assets	19,900
Accounts payable	(602)
Accrued expenses and other current liabilities	(323)
Accrued compensation	(223)
Long-term lease liabilities	(1,546)
Other long-term liabilities	(164)
Identifiable net assets acquired	20,078
Goodwill	41,102
Total purchase price	$	61,180

The following is a summary of identifiable intangible assets acquired and the related expected lives for the finite-lived intangible assets (in thousands):


Category	Estimated Life in Years	Fair Value
Finite-lived intangible assets:
Developed technology	7	$	17,500
Trademarks and tradenames	7	1,000
Customer-related intangible	5	900
Product backlog	5.33	500
Total identifiable intangible assets acquired		$	19,900

Assumptions in the Allocations of Purchase Price

Management prepared the purchase price allocations for the Wi-Fi and Broadband assets business and NanoSemi, and in doing so considered or relied in part upon reports of a third party valuation expert to calculate the fair value of certain acquired assets, which primarily included identifiable intangible assets, inventory, and property and equipment, and the portions of the purchase consideration for NanoSemi expected to be paid to NanoSemi stockholders in the future, as described above. Certain NanoSemi stockholders that are employees are not required to remain employed in order to receive the deferred payments and contingent consideration; accordingly, the fair value of the deferred payments and contingent consideration have been accounted for as a portion of the purchase consideration.

Estimates of fair value require management to make significant estimates and assumptions. The goodwill recognized is attributable primarily to the acquired workforce, expected synergies, and other benefits that MaxLinear believes will result from integrating the operations of the Wi-Fi and Broadband assets business and NanoSemi with the operations of MaxLinear. Certain liabilities included in the purchase price allocations are based on management’s best estimates of the amounts to be paid or settled and based on information available at the time the purchase price allocations were prepared. There have been no adjustments between the preliminary purchase price allocations reflected as of December 31, 2020 and the purchase price allocation reflected as of June 30, 2021. Updates to the valuations of certain assets acquired and liabilities assumed and our evaluation of certain income tax positions may result in changes to the recorded amounts of assets and liabilities, with corresponding adjustments to goodwill amounts in subsequent periods. We expect to complete the purchase price allocations within 12 months of the respective acquisition dates.

The fair value of the identified intangible assets acquired from the Wi-Fi and Broadband assets business and NanoSemi was estimated using an income approach. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. More specifically, the fair value of the developed technology, IPR&D and backlog assets was determined using the multi-period excess earnings method, or MPEEM. MPEEM is an income approach to fair value measurement attributable to a specific intangible asset being valued from the asset grouping’s overall cash-flow stream. MPEEM isolates the expected future discounted cash-flow stream to its net present value. Significant factors considered in the calculation of the developed technology and IPR&D intangible assets were the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on core technology, the existence of any alternative future use or current technological feasibility and the complexity, cost, and time to complete the remaining development. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account the expected product life cycles, market penetration, and growth rates. Developed technology will begin amortization immediately and IPR&D will begin amortization upon the completion of each project. If any of the projects are abandoned, the Company will be required to impair the related IPR&D asset.

In connection with the acquisition of the Wi-Fi and Broadband assets business, the Company has assumed liabilities which primarily consist of accrued employee compensation and benefits in jurisdictions where such transfer is required either by law or by work council agreement. In connection with the acquisition of NanoSemi, the Company assumed certain operating liabilities. The liabilities assumed in these acquisitions are included in the respective purchase price allocations above.

Goodwill recorded in connection with the Wi-Fi and Broadband assets business and NanoSemi was $23.4 million and $41.1 million, respectively. The Company does not expect to deduct any of the acquired goodwill for tax purposes.