Acquisition of Stability Inc.

9 Months Ended

Sep. 30, 2016

Business Combinations [Abstract]

Acquisition of Stability Inc.

Acquisition of Stability Inc.

On January 13, 2016, the Company completed the acquisition of Stability Inc., d/b/a Stability Biologics ("Stability"), a provider of human tissue products to surgeons, facilities, and distributors serving the surgical, spine, and orthopedic sectors of the healthcare

industry. As a result of this transaction, the Company acquired all of the outstanding shares of Stability in exchange for

$6,000,000 cash, $3,346,000 in stock, represented by 441,009 shares of our common stock, and assumed debt of $1,771,000. Additional one time costs incurred in connection with the transaction totaled $1,088,000 and are included within selling, general and administrative expenses on the condensed consolidated statements of operations. Contingent consideration may be payable in a formula determined by sales less certain expenses for the years 2016 and 2017. As of September 30, 2016, the contingent consideration was valued at $25,620,000 and is shown in the schedule below as fair value of earn-out. The Company used a third party specialist to assist us with the valuation. The contingent consideration was classified as a liability.

The Company has evaluated the contingent consideration for accounting purposes under GAAP and has determined that the

contingent consideration is within the scope of ASC 480 "Distinguishing Liabilities from Equity" whereby a financial instrument,

other than an outstanding share, that embodies a conditional obligation that the issuer may settle by issuing a variable number

of its equity shares shall be classified as a liability if, at inception, the monetary value of the obligation is based solely or

predominantly on variations in something other than the fair value of the issuer’s equity shares.

The actual purchase price was based on cash paid, the fair value of our stock on the date of the acquisition, and direct costs

associated with the combination. The actual purchase price has been preliminarily allocated as of September 30, 2016 (in

thousands) and is subject to change:

Cash paid at closing	$	6,000
Working capital adjustment	(480		)
Common stock issued (441,009 shares valued at $9.07 per share)	3,346
Assumed debt	1,771
Fair value of earn-out	25,620
Total fair value of purchase price	$	36,257
Net assets acquired:
Debt-free working capital	$	2,179
Other assets, net	199
Property, plant and equipment	1,375
Deferred tax liability	(8,268		)
Subtotal	(4,515		)
Intangible assets:
Customer relationships	6,090
Patents and know-how	9,170
Trade names and trademarks	830
Non compete agreements	1,080
Licenses and permits	690
Subtotal	17,860
Goodwill	22,912
Total Assets Purchased	$	36,257
Working capital and other assets were composed of the following (in thousands):
Working capital
Cash	$	140
Prepaid Expenses and other current assets	100
Accounts receivable	2,001
Federal and state taxes receivable	28
Inventory	8,725
Accounts payable and accrued expenses	(8,815		)
Debt-free working capital	$	2,179
Current portion of long term debt	$	(194	)
Long-term debt	(560		)
Line of Credit	(932		)
Shareholder loan	(85		)
Net working capital	$	408
Other assets:
Other long term assets	$	199

The acquisition was accounted for as a purchase business combination as defined by FASB Topic 805 - "Business Combinations". The fair value of the contingent consideration is measured as a Level 3 instrument. The contingent consideration liability is recorded at fair value on the acquisition date and will be remeasured quarterly until purchase accounting is completed based on the assessed fair value and adjusted if necessary. The increases or decreases in the fair value of contingent consideration can result from changes in anticipated revenue levels and changes in assumed discount periods and rates. As the fair value measured is based on significant inputs that are not observable in the market, they are categorized as Level 3. The income valuation approach was applied in determining the fair value of the contingent consideration using a discounted cash flow valuation technique with significant unobservable inputs comprised of projected sales and certain expenses. The values assigned to intangible assets are subject to amortization. The intangible assets were assigned the following lives for amortization purposes:

	Estimated useful life (in years)
Intangible asset:
Customer relationships	12
Patents and know-how	20
Trade name and Trademarks	Indefinite
Non compete agreements	4
Licenses and permits	2

Goodwill consists of the excess of the purchase price paid over the identifiable net assets and liabilities acquired at fair value.

Goodwill was determined using the residual method based on an independent appraisal of the assets and liabilities acquired in

the transaction and is preliminary as of September 30, 2016 and is subject to change. Goodwill is tested for impairment on an annual basis as defined by FASB Topic 350 - "Intangibles - Goodwill and Other".

The following unaudited pro forma summary financial information presents the consolidated results of operations for the Company as if the acquisition had occurred on January 1, 2015. The pro forma results are shown for illustrative purposes only and do not purport to be indicative of the results that would have been reported if the acquisition had occurred on the date indicated or indicative of the results that may occur in the future.

Unaudited pro forma information for the three and nine months ended September 30, 2016 and 2015 (in thousands) is as follows:

	Three months ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Revenue	$	64,429	$	52,108	$	175,687	$	148,521
Net income	$	3,406	$	4,253	$	7,074	$	12,227
Income per share, fully diluted	$	0.03	$	0.04	$	0.06	$	0.11

The 2016 supplemental pro forma earnings were adjusted to exclude $1,088,000 of acquisition-related legal, audit and other

costs, net of tax. The 2015 supplemental pro forma earnings were adjusted to include $1,186,000 of amortization costs related to recorded intangible assets with defined useful lives, and $1,471,000 of inventory step-up charges as a result of the acquisition for comparability to 2016. The number of shares outstanding used in calculating the income per share for 2015 was adjusted to include 441,009 shares issued as part of the purchase price and assumed to be issued on January 1, 2015.