Acquisitions and Strategic Investments

9 Months Ended

Sep. 30, 2016

Business Combinations [Abstract]

Acquisitions and Strategic Investments

Acquisitions and Strategic Investments. On July 6, 2016, we consummated the transactions contemplated by an Agreement and Plan of Merger by and among Merit, MMS Transaction Co., a wholly-owned subsidiary of Merit, DFINE Inc. ("DFINE"), certain preferred stockholders of DFINE and Shareholder Representative Services LLC, as a stockholder representative, and acquired all of the issued and outstanding shares of DFINE (the “Acquisition”). We made an initial payment of $97.5 million to certain DFINE stockholders on July 6, 2016 and paid approximately $578,000 related to a net working capital adjustment subject to review by Merit and the preferred stockholders of DFINE. We accounted for the Acquisition as a business combination. Acquisition-related costs during the three and nine-month periods ended September 30, 2016, which are included in selling, general, and administrative expenses in the consolidated statements of income, were approximately $1.6 million. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. Our consolidated financial statements for the three and nine months ended September 30, 2016 include approximately $7.0 million of net sales related to the acquisition. It is not practical to separately report the earnings related to the Acquisition, as we cannot split out sales costs related to DFINE products, principally because our sales representatives are selling multiple products (including DFINE products) in the cardiovascular business segment. The purchase price was preliminarily allocated to the net tangible and intangible assets acquired and liabilities assumed, based on available information, as follows (in thousands):

Assets Acquired
Trade receivables	4,054
Other receivables	6
Inventories	8,674
Prepaid expenses	630
Property and equipment	1,739
Other long-term assets	145
Intangibles
Developed technology	67,600
Customer lists	2,400
Trademarks	4,400
Goodwill	26,029
Total assets acquired	115,677
Liabilities Assumed
Trade payables	(1,790	)
Accrued expenses	(5,705	)
Deferred income tax liabilities - current	(603	)
Deferred income tax liabilities - noncurrent	(10,829	)
Total liabilities assumed	(18,927	)
Net assets acquired, net of cash received of $1,327	96,750

The gross amount of trade receivables we acquired in the Acquisition was approximately $4.3 million, of which approximately $224,000 was expected to be uncollectible. With respect to the DFINE assets, we intend to amortize developed technology over fifteen years and customer lists on an accelerated basis over nine years. While U.S. trademarks can be renewed indefinitely, we currently estimate that we will generate cash flow from the acquired trademarks for a period of fifteen years from the acquisition date. The total weighted-average amortization period for these acquired intangible assets is 14.8 years.

The following table summarizes our unaudited consolidated results of operations for the three and nine-month periods ended September 30, 2015, as well as unaudited pro forma consolidated results of operations as though the Acquisition had occurred on January 1, 2015 (in thousands, except per common share amounts):

	Three Months Ended				Nine Months Ended
	September 30, 2015				September 30, 2015
	As Reported		Pro Forma		As Reported		Pro Forma
Net Sales	$	136,086	$	144,344	$	403,745	$	428,881
Net Income	4,818		673		17,393		5,190
Earnings per common share:
Basic	$	0.11	$	0.02	$	0.40	$	0.12
Diluted	$	0.11	$	0.02	$	0.39	$	0.12

On February 4, 2016, we purchased the HeRO® Graft device and other related assets from CryoLife, Inc., a developer of medical devices based in Kennesaw, Georgia ("CryoLife"). The purchase price was $18.5 million, which was paid in full during the first quarter of 2016. We accounted for this acquisition as a business combination. The purchase price was allocated as follows (in thousands):

Assets Acquired
Inventories	2,455
Fixed Assets	290
Intangibles
Developed Technology	12,100
Trademarks	700
Customer Lists	400
Goodwill	2,555
Total assets acquired	18,500

We are amortizing the developed HeRO Graft technology asset over ten years, the related trademarks over 5.5 years, and the associated customer lists over 12 years. We have estimated the weighted average life of the intangible HeRO Graft assets acquired to be approximately 9.82 years. Acquisition-related costs related to the HeRO Graft device and other related assets during the nine months ended September 30, 2016, which are included in selling, general and administrative expenses in the accompanying consolidated statements of income, were not material. The results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date. During the three and nine-month periods ended September 30, 2016, our net sales of the products acquired from CryoLife were approximately $1.9 million and $5.2 million, respectively. It is not practical to separately report the earnings related to the products acquired from CryoLife, as we cannot split out sales costs related to those products, principally because our sales representatives are selling multiple products (including the HeRO Graft device) in the cardiovascular business segment. The pro forma consolidated results of operations acquired from CryoLife are not presented, as we believe the pro forma financial effect of the transaction is not material.

On January 20, 2016, we paid $2.0 million for 2.0 million preferred limited liability company units of Cagent Vascular, LLC, a medical device company ("Cagent"). During the three months ended June 30, 2016, we paid $500,000 for an additional 500,000 preferred limited liability company units of Cagent. Our total purchase price paid for the Cagent preferred limited liability company units as of September 30, 2016, which represents an ownership interest of approximately 18.6% of Cagent, has been accounted for at cost.

On December 4, 2015, we entered into a license agreement with ArraVasc Limited, an Irish medical device company, for the right to manufacture and sell certain percutaneous transluminal angioplasty balloon catheter products. As of December 31, 2015, we had paid $500,000 pursuant to the terms of the license agreement. During the nine-month period ended September 30, 2016, we paid an additional $1.25 million as certain milestones set forth in the license agreement were met during that period. We are obligated to pay an additional $250,000 if additional milestones set forth in the license agreement are reached. We accounted for the transaction as an asset purchase and intend to amortize the license agreement intangible asset over a period of 12 years.

On July 14, 2015, we entered into an asset purchase agreement with Quellent, LLC, a California limited liability company ("Quellent"), for superabsorbent pad technology. The purchase price for the asset was $1.0 million, payable in two installments. We accounted for this acquisition as a business combination. The first payment of $500,000 was paid as of December 31, 2015, and the second payment of $500,000 was recorded as an accrued liability as of December 31, 2015 and paid in the first quarter of 2016. We also recorded $270,000 of contingent consideration related to royalties payable to Quellent pursuant to the asset purchase agreement as of December 31, 2015. The sales and results of operations related to this acquisition have been included in our cardiovascular segment since the acquisition date and were not material. The purchase price was allocated as follows: $1.21 million to a developed technology intangible asset and $60,000 to goodwill as of December 31, 2015. We are amortizing the developed technology intangible asset over 13 years. The pro forma consolidated results of operations are not presented, as we believe the pro forma financial effect of the transaction is not material.

The goodwill arising from the acquisitions discussed above consists largely of the synergies and economies of scale we hope to achieve from combining the acquired assets and operations with our historical operations (see Note 12). The goodwill recognized from these acquisitions is expected to be deductible for income tax purposes.