20. Subsequent Events (unaudited)

Acquisition of On-X Life Technolgies

Overview

On December 22, 2015 the Company, entered into the Agreement and Plan of Merger (“On-X Agreement”) to acquire On-X, an Austin, Texas-based, privately held mechanical heart valve company, for approximately $130.0 million, subject to certain adjustments, consisting of approximately $91.0 million in cash and $39.0 million of CryoLife’s common stock. The transaction closed on January 20, 2016 and On-X will be operated as a wholly-owned subsidiary of CryoLife.

The On-X catalogue of products includes the On-X prosthetic aortic and mitral heart valve and the On-X ascending aortic prosthesis (“AAP”). On-X also distributes CarbonAid CO₂ diffusion catheters, manufactures Chord-X ePTFE sutures for mitral chordal replacement, and offers pyrolytic carbon coating services to other medical device manufacturers. CryoLife believes that the On-X products will fit well into its product portfolio of medical devices for cardiac surgery and believes there is a significant opportunity for CryoLife’s sales team to leverage their strong relationships with cardiac surgeons to introduce and to expand utilization of the On-X valve in the U.S. and internationally.

Accounting for the Transaction

Per the Company’s preliminary analysis, the purchase price of the transaction totaled approximately $128.0 million, consisting of cash of $93.4 million and 3,703,699 shares of CryoLife common stock, with a value of $34.6 million as determined on the date of the closing. This purchase price is subject to several potential adjustments, including a working capital adjustment, which has not yet been finalized. The Company’s preliminary allocation of the $128.0 million purchase price to On-X’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of January 20, 2016, is included in the table below. Goodwill will be 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. The allocation of the purchase price is preliminary and differences between the preliminary and final purchase price allocation could be material. This allocation of purchase price is expected to change based on a variety of factors including, but not limited to, determination of the valuation of intangible assets acquired, the fair value of inventories acquired, the amount of current and deferred tax assets and liabilities acquired, and the amount of non-tax liabilities assumed. Goodwill from this transaction will be allocated to the Company’s medical devices segment.

The preliminary purchase price allocation as of January 20, 2016 is as follows (in thousands):


	Opening
	Balance Sheet
Cash and cash equivalents	$	2,472
Receivables		6,503
Inventories		13,284
Intangible assets and goodwill		96,937
Other assets		13,426
Liabilities assumed		(4,557)
Total purchase price	$	128,065

CryoLife incurred transaction and integration costs of $2.8 million for the year ended December 31, 2015. 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

The Company’s unaudited pro forma results of operations for the year ended December 31, 2015 and 2014 assuming the On-X acquisition had occurred as of January 1, 2014 are presented for comparative purposes below. These amounts are based on available information of the results of operations of On-X 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, 2014. The pro forma adjustments related to the acquisition of On-X are based on a preliminary purchase price allocation. Differences between the preliminary and final purchase price allocation could have an impact on the pro forma financial information presented below and that impact could be material. This unaudited pro forma information does not project operating results post acquisition.

This preliminary pro forma information is as follows (in thousands, except per share amounts):


	2015		2014
Total revenues	$	179,266	$	177,722
Net income		6,458		3,730

Pro forma net income was calculated using a tax rate of approximately 38%.

Divestiture of the HeRO Graft Product Line

On February 3, 2016 the Company sold its HeRO Graft product line to Merit Medical Systems, Inc. (“Merit”) for $18.5 million in cash. Under terms of the agreement, Merit acquired the HeRO Graft product line, including worldwide marketing rights, customer relationships, intellectual property, inventory, and certain property and equipment. The Company will continue to manufacture the HeRO Graft for up to six months under a transition supply agreement, after which Merit will be responsible for manufacturing. The disposal of the HeRO Graft is part of a strategic shift of the Company’s focus to selling its expanded portfolio of cardiac surgery products, including the On-X heart valve.

The HeRO Graft product line was included as part of the Company’s Medical Devices segment. The Company is in the process of completing the accounting related to this sale, including an allocation of its medical device segment goodwill to the divested business using a relative fair value allocation method. The assets divested in this transaction did not meet the criteria to be reported as assets held for sale as of December 31, 2015. As of December 31, 2015 the Company had approximately $8.0 million in carrying value of assets, before the allocation of goodwill, associated with this divested product line on its Consolidated Balance Sheet, primarily in intangible assets and inventory.