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Acquisitions and Divestitures
9 Months Ended
Sep. 30, 2018
Business Combinations [Abstract]  
Acquisitions and Divestitures

4. Acquisitions and Divestitures

Acquisitions are accounted for using the acquisition method, and the acquired companies’ results have been included in the accompanying consolidated financial statements from their respective dates of acquisition. In each case for the acquisitions disclosed below, pro forma information assuming the acquisition had occurred at the beginning of the earliest period presented is not included, as the impact is immaterial.

Our acquisitions have historically been made at prices above the fair value of the acquired identifiable assets, resulting in goodwill, due to expectations of synergies that will be realized by combining businesses. These synergies include the use of our existing sales channel to expand sales of the acquired businesses’ products and services, consolidation of manufacturing facilities, and the leveraging of our existing administrative infrastructure. The fair market valuations associated with these transactions fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value. The fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method. The amount and timing of future cash flows within our analysis was based on our due diligence models, most recent operational budgets, long range strategic plans and other estimates. Our assumptions associated with these Level 3 valuations are discussed below and in Note 12 to these financial statements.

Applied Medical

On September 20, 2018, we entered into an agreement to acquire the assets of the clot management device business of Applied Medical Resource Corporation (Applied). The clot management business consists of several embolectomy and thrombectomy catheter product lines which are sold worldwide (approximately 60% in the U.S. and 40% outside the U.S.). On the same date, we entered into a transition services agreement under which Applied will manufacture and supply us with inventory for a period of twelve months, unless extended in writing by both parties.

The purchase price for the acquired assets, which included inventory, machinery and equipment, intellectual property, permits and approvals, data and records, and customer and supplier information, was $14.2 million. Of this amount, $11 million was paid at closing, with another $2 million due 12 months following the closing date, and the final $1.2 million due 24 months following the closing date. The deferred amounts totaling $3.2 million were recorded at an acquisition-date fair value of $3.043 million using a discount rate of 3.75% to reflect the time value of money between the acquisition date and the payment due dates.

The following table summarizes the preliminary purchase price allocation:

 

     Allocated
Fair Value
 
     (in thousands)  

Inventory

   $ 666  

Equipment and supplies

     600  

Intangible assets

     6,527  

Goodwill

     6,250  
  

 

 

 

Purchase price

   $ 14,043  
  

 

 

 

The goodwill results from expected synergies of combining the acquired products and customer information to our existing operations, and is deductible for tax purposes over 15 years.

 

The following table reflects the preliminary allocation of purchase consideration to the acquired intangible assets and related estimated useful lives:

 

     Allocated
Fair Value
     Weighted
Average
Useful Life
 
     (in thousands)         

Customer relationships

   $ 4,475        16.0 years  

Intellectual property

     1,316        7.0 years  

Non-compete agreement

     530        5.0 years  

Tradenames

     206        7.0 years  
  

 

 

    

Total intangible assets

   $ 6,527     
  

 

 

    

The weighted-average amortization period of the acquired intangible assets was 13.0 years.

RestoreFlow Allografts

On November 10, 2016, we entered into an agreement to acquire the assets of Restore Flow Allografts, LLC, a provider of human vascular tissue processing and cryopreservation services, for an initial purchase price of $12 million, with three additional payments of up to $2 million each ($6 million in total), depending upon the satisfaction of certain contingencies. One payment of $2 million was due not later than 15 days following the expiration of the 18 month period following the closing date, subject to reductions as specified in the agreement for each calendar month that certain retained employees were not employed by us due to resignation without good reason, or termination for cause, both as defined in the agreement. The portion of this payment that was to be paid to retained employees and that was contingent on their continued employment, estimated at $0.9 million, was being accounted for as post-combination compensation expense rather than purchase consideration. The remaining $1.1 million that was payable to non-employee investors but that was also contingent on the continued employment of the retained employees had been accounted for as contingent purchase consideration, at an acquisition-date fair value of $0.9 million. In May 2018 we paid this $2 million liability as the contingency was met.

There are also two potential earn-out payments under the agreement. The first earn-out was to be calculated at 50% of the amount by which net revenue in the first 12 months following the closing exceeded $6 million, with such payout not to exceed $2 million. This milestone was not met and accordingly no amount was paid out. The second earn-out is calculated at 50% of the amount by which net revenue in the second 12 months following the closing exceeds $9 million, with such payout not to exceed $2 million. These earn-outs were accounted for as contingent consideration, at an acquisition-date fair value of $0.1 million for the two earn-outs combined. This valuation was derived by utilizing an option pricing model technique incorporating, among other inputs, management’s forecasts of future revenues, the expected volatility of revenues, and an estimated weighted average cost of capital of 14.1% to account for the risk of achievement of the revenue forecasts as well as the time value of money between acquisition date and the payment date.

The RestoreFlow business derives revenue from human tissue preservation services, in particular the processing and cryopreservation of veins and arteries. By federal law, human tissues cannot be bought or sold. Therefore, the tissues we obtain and preserve are not held as inventory, and the costs we incur to procure and process vascular tissues are instead accumulated and deferred. Revenues are recognized for the provision of cryopreservation services rather than product sales.

The acquired assets included intellectual property, permits and approvals, data and records, equipment and furnishings, accounts receivable, inventory, literature, and customer and supplier information. We also assumed certain accounts payable. We accounted for the acquisition as a business combination.

The following table summarizes the final purchase price allocation:

 

     Allocated
Fair Value
 
     (in thousands)  

Accounts receivable

   $ 394  

Deferred cryopreservation costs

     2,583  

Equipment and supplies

     125  

Accounts payable

     (286

Intangible assets

     4,544  

Goodwill

     5,599  
  

 

 

 

Purchase price

   $ 12,959  
  

 

 

 

 

The goodwill is deductible for tax purposes over 15 years.

The following table reflects the allocation of purchase consideration to the acquired intangible assets and related estimated useful lives:

 

     Allocated
Fair Value
     Weighted
Average
Useful Life
 
     (in thousands)         

Non-compete agreements

   $ 180        5.0 years  

Tradename

     271        9.0 years  

Procurement contracts

     617        9.0 years  

Technology

     2,793        10.5 years  

Customer relationships

     683        12.5 years  
  

 

 

    

Total intangible assets

   $ 4,544     
  

 

 

    

The weighted-average amortization period of the acquired intangible assets was 10.3 years.

ProCol Biologic Graft

On March 18, 2016, we acquired the ProCol biologic vascular graft (“ProCol”) business for $2.7 million from Hancock Jaffe Laboratories, Inc. (HJL) and CryoLife, Inc. (CRY). HJL was the owner and manufacturer of ProCol and CRY was the exclusive distributor of the ProCol graft. CRY also owned an option to purchase the ProCol business, which we acquired from CRY. We bought finished goods inventory and other ProCol related assets from CRY for $2.0 million, which was paid in full at closing. We bought other ProCol assets from HJL for $0.7 million, 50% of which was paid at closing, with the remainder paid at subsequent dates as specified in the agreement. Additional consideration is payable to HJL for a three-year period following the closing, calculated at 10% of ProCol revenues. This additional consideration was initially valued at $0.3 million and is being re-measured each reporting period until the payment requirement ends, with any adjustments reported in income from operations. To date since the acquisition there have been no material adjustments.

Assets acquired included inventory, intellectual property and a related license, the ProCol trade name, customer lists, non-compete agreements and certain equipment and supplies. We did not assume any liabilities. We accounted for the acquisition as a business combination. The purchase accounting is complete.

The following table summarizes the purchase price allocation as of the acquisition date:

 

     Allocated
Fair Value
 
     (in thousands)  

Inventory

   $ 2,080  

Manufacturing equipment and supplies

     25  

Intangible assets

     620  

Goodwill

     318  
  

 

 

 

Purchase price

   $ 3,043  
  

 

 

 

The goodwill is deductible for tax purposes over 15 years.

 

The following table reflects the allocation of purchase consideration to the acquired intangible assets and related estimated useful lives:

 

     Allocated
Fair Value
     Weighted
Average
Useful Life
 
     (in thousands)         

Non-compete agreement

   $ 84        5.0 years  

Tradename

     109        9.5 years  

Intellectual property

     277        9.0 years  

Customer relationships

     150        9.0 years  
  

 

 

    

Total intangible assets

   $ 620     
  

 

 

    

The weighted-average amortization period of the acquired intangible assets was 8.6 years.

Reddick Divestiture

On April 5, 2018, we entered into an asset purchase agreement with Specialty Surgical Instrumentation, Inc. to sell the inventory, intellectual property and other assets associated exclusively with our Reddick cholangiogram catheter and Reddick Saye-Screw product lines for $7.4 million. In connection with this divestiture we at the same time entered into a transition services agreement under which we will continue to manufacture and supply these products to the buyer for a period of up to two years unless extended by both parties, as well as a balloon supply agreement under which we will supply latex balloons, a component of the cholangiogram catheters, to the buyer for a period of up to six years unless extended by both parties. During the three months ending June 30, 2018 we recorded a gain in connection with these agreements of $5.9 million. The following table summarizes the allocation of consideration received:

 

     Allocated
Fair Value
 
     (in thousands)  

Inventory

   $ 308  

Deferred revenue—transition services agreement

     1,081  

Goodwill

     135  

Gain on divestiture

     5,876  
  

 

 

 

Consideration received

   $ 7,400  
  

 

 

 

Under the terms of the transition services agreement, we have agreed to manufacture the Reddick products for the buyer at prices at or in some cases below our cost. We allocated a portion of the consideration received to this agreement to reflect it at fair value and recorded it as deferred revenue. As the products are sold to the buyer, we amortize a portion of the deferred revenue to adjust the gross margin on the sale to fair value on a specific identification basis. Additionally, as the Reddick product lines that were divested constituted a business, we allocated a portion of our goodwill to this divestiture based on the fair value of the business sold in relation to the fair value of the business that will be retained.

Subsequent Event

On October 22, 2018, we entered into an agreement to acquire the assets of Cardial, a French joint stock company, whose business consists of the manufacture and sale of knitted and woven vascular grafts, valvulotomes and surgical glue, for a purchase price of €1.2 million. In connection with this asset purchase, we simultaneously entered into an agreement to purchase the land and building in which Cardial is located, for €0.8 million, bringing the total price paid for the business to €2.0 million. During the three months ending December 31, 2018 we expect to record a gain of approximately €1.6 million in connection with these agreements resulting from the excess value of the assets acquired over the purchase price of the transaction, subject to finalization of the purchase accounting for the transactions.