Hemosphere Acquisition

12 Months Ended

Dec. 31, 2014

Hemosphere Acquisition [Abstract]

Hemosphere Acquisition

5.  Hemosphere Acquisition

Overview  

On May 16, 2012 CryoLife completed its acquisition of Hemosphere, a privately held company, and its HeRO Graft product line for a total purchase price of approximately $22.0 million, net of $3.2 million cash acquired.  CryoLife used cash on hand to fund the transaction and operated Hemosphere as a wholly owned subsidiary until December 31, 2014, when it was merged into the CryoLife, Inc. parent entity.  The HeRO Graft is a proprietary graft-based solution for ESRD hemodialysis patients with limited access options and central venous obstruction. 

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.  This fair value measurement was based on unobservable inputs, including management estimates and assumptions about future revenues, and was, therefore, classified as Level 3 within the fair value hierarchy presented in Note 2.  The Company remeasured this liability at each reporting date and recorded 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.  As of December 31, 2014 the Company reviewed the full year revenue performance of Hemosphere for 2014 and 2013, and reviewed its 2015 annual budgets, which were updated in the fourth quarter of 2014.  As a result of this review, as of December 31, 2014 the Company believed that achievement of the minimum revenue target to trigger payment was remote, and, therefore, estimated the fair value of the contingent consideration to be zero.

The Company recorded gains of $1.9 million and $28,000 for the year endedDecember 31, 2014 and 2013, respectively, on the remeasurement of the contingent consideration liability.  The balance of the contingent consideration liability was zero and $1.9 million as of December 31, 2014 and 2013, respectively.

Accounting for the Transaction

The Company 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 was 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 (unaudited)

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 pro forma results of operations for the year ended2012 assuming the Hemosphere acquisition had occurred as of January 1, 2012 are presented for comparative purposes below (in thousands):

	2012
Total revenues	$	133,722
Net income		8,758

Pro forma disclosures were calculated using a tax rate of approximately 34%.