Hemosphere Acquisition (Hemosphere [Member])

12 Months Ended

Dec. 31, 2013

Hemosphere [Member]

Business Acquisition [Line Items]

Hemosphere Acquisition

4.  Hemosphere Acquisition

Overview  

On May 16, 2012 CryoLife completed its acquisition of 100% of the outstanding equity of Hemosphere, a privately held company, for $17.0 million in cash, an additional $3.2 million paid for cash acquired, and contingent consideration with a fair value estimated to be approximately $1.8 million at acquisition, for a total purchase price of approximately $22.0 million.  CryoLife used cash on hand to fund the transaction and operates Hemosphere as a wholly owned subsidiary.  

Hemosphere is the developer and marketer of the HeRO Graft, a proprietary graft-based solution for end-stage renal disease hemodialysis patients with limited access options and central venous obstruction.  CryoLife believes that the HeRO Graft will fit well into its product portfolio of medical devices for cardiac and vascular surgery and believes there is a significant opportunity for CryoLife’s sales team to leverage their strong relationships with vascular surgeons to introduce and to expand utilization of the HeRO Graft in the U.S.  

Contingent Consideration  

As of the acquisition date, CryoLife recorded a contingent consideration liability of $1.8 million in long-term liabilities on its Consolidated Balance Sheet, representing the estimated fair value of the contingent consideration expected to be paid to the former shareholders of Hemosphere upon the achievement of certain revenue-based milestones.  The acquisition agreement provides for a maximum of $4.5 million in future consideration payments through December 2015 based on specified sales targets.  

The fair value of the contingent consideration liability was estimated by discounting to present value the contingent payments expected to be made based on a probability-weighted scenario approach.  The Company applied a risk-based estimate of the probability of achieving each scenario and then applied a cost of debt based discount rate of 8%.  This fair value measurement is based on unobservable inputs, including management estimates and assumptions about future revenues, and is, therefore, classified as Level 3 within the fair value hierarchy presented in Note 2.  The Company will remeasure this liability at each reporting date and will record changes in the fair value of the contingent consideration in other (income) expense on the Company’s Consolidated Statements of Operations and Comprehensive Income.  Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing and amount of Company revenue estimates.

The Company recorded a gain of $28,000 for the year endedDecember 31, 2013 and a loss of $72,000 for the year ended December 31, 2012 on the remeasurement of the contingent consideration liability.  The balance of the contingent consideration liability was $1.9 million as of December 31, 2013 and 2012.

Accounting for the Transaction

The Company has recorded an allocation of the $22.0 million purchase price to Hemosphere’s tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of May 16, 2012.  Goodwill has been recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is not deductible for tax purposes.  Goodwill from this transaction has been allocated to the Company’s medical devices segment. 

The purchase price allocation as of December 31, 2012 is as follows (in thousands):

	Opening
	Balance Sheet
Cash and cash equivalents	$	3,155
Receivables		653
Inventories		554
Intangible assets		5,790
Goodwill		7,145
Deferred tax assets, net		5,379
Other assets		331
Liabilities assumed		(972)
Total purchase price	$	22,035

CryoLife incurred integration costs of $940,000 for the year ended December 31, 2013 and transaction and integration costs related to the acquisition of approximately $2.4 million for the year endedDecember 31, 2012.   These costs were expensed as incurred and were primarily recorded as general, administrative, and marketing expenses on the Company’s Consolidated Statements of Operations and Comprehensive Income.

Pro Forma Results

Hemosphere’s revenues of $3.1 million from the date of acquisition through December 31, 2012 are included in the Consolidated Statements of Operations and Comprehensive Income.  The Company’s unaudited pro forma results of operations for the year endedDecember 31, 2012 and 2011assuming the Hemosphere acquisition had occurred as of January 1, 2011 are presented for comparative purposes below.  These amounts are based on available information of the results of operations of Hemosphere prior to the acquisition date and are not necessarily indicative of what the results of operations would have been had the acquisition been completed on January 1, 2011.  This unaudited pro forma information does not project operating results post acquisition.  This pro forma information is as follows (in thousands, except per share amounts):

	Twelve Months Ended
	December 31,
	2012		2011
Total revenues	$	133,722	$	124,877
Net income		8,758		3,205
Pro forma income per common share - basic	$	0.32	$	0.11
Pro forma income per common share - diluted	$	0.31	$	0.11

Pro forma results for the year ended December 31, 2011 include the Company’s acquisition and integration related costs of approximately $2.4 million, on a pre-tax basis, and other costs as appropriate.  Pro forma disclosures were calculated using a tax rate of approximately 34%.