Note 6 - Business Combination

9 Months Ended

Sep. 30, 2021

Notes to Financial Statements

Business Combination Disclosure [Text Block]

6. Business Combination

Emerald Medical Services and Emerald Extrusion Services

On May 18, 2020, Intricon Pte. Ltd. (“Buyer”), a wholly-owned subsidiary of the Company, acquired all of the outstanding shares of Emerald Medical Services Pte., Ltd., a Singapore company (“EMS”) for a total purchase price of $11,815. EMS, based in Singapore, is a provider of joint development medical device manufacturing services for complex catheter applications.

In addition, the Company has a 54% ownership interest in Emerald Extrusion Services LLC. (“EES), based in California. Based on this controlling financial interest, the Company has consolidated this entity. The remaining ownership is accounted for as a non-controlling interest and reported as part of equity in the condensed consolidated balance sheets.

We accounted for the acquisition in accordance with ASC 805, Business Combinations, with identifiable assets acquired and liabilities assumed recorded at their estimated fair value on the acquisition date. During the one year window since the purchase date, the Company recorded certain adjustments related to changes in valuation estimates of accounts receivable, inventory, equipment, and deferred taxes as well as changes to the non-controlling interest balance. These purchase accounting adjustments resulted in a $159 increase to Goodwill during 2021. The purchase price allocation of the fair value of the assets acquired and liabilities assumed was finalized as of June 30, 2021 as shown in the table below.

Current assets	$	3,161
Property, plant and equipment		360
Intangible assets		6,400
Goodwill		4,321
Noncurrent assets		169
Current liabilities		(1,105	)
Noncurrent liabilities		(1,491	)
Total consideration paid	$	11,815

A portion of the purchase price is in the form of a contingent consideration liability calculated using a scenario-based method utilizing various level 3 inputs including revenue volatility, weighted average cost of capital and discount rate percentages. Level 3 is a fair value measure in which there are no observable inputs used to value an asset or liability and the fair value is determined based on modeling and the use of management estimates and assumptions. The key valuation assumptions included forecasts of future revenues and the selection of the discount rate. The liability for contingent consideration is subject to fair value adjustments each reporting period that will be recognized through the condensed consolidated statement of operations within other operating expenses. During the three and nine months ended September 30, 2021 changes to forecast estimates of future revenues resulted in a $479 adjustment to reduce the contingent consideration liability resulting in income recorded within other operating (income) expenses in the Company's condensed consolidated statement of operations. 

Quantitative information about Level 3 inputs for fair value measurement of the contingent consideration liability are detailed in “Note 2: Business Combination” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Significant increases or decreases in these inputs in isolation could result in a significant impact on the fair value measurement.

The reconciliation of the contingent consideration liability measured and carried at fair value on a recurring basis is as follows:

Carrying amount at December 31, 2020	$	3,574
Change in fair value		(389	)
Less payments		(1,052	)
Carrying amount at September 30, 2021	$	2,133

Since the acquisition, the Company has paid $1,552 of the original contingent consideration liabilities. As of September 30, 2021, approximately $2,133 remains contingent on future performance.

Our condensed consolidated statements of operations for the three and nine months ended September 30, 2021 include revenues of $3,439 and $11,439, respectively, and net income of $662 and $1,293, respectively, attributable to EMS.  Our condensed consolidated statements of operations for the three and nine months ended September 30, 2020 include revenues of $2,816 and $3,961, respectively and net income of ($48) and $0, respectively, attributable to EMS for the period from May 19 through September 30, 2020.

See Note 2 of our Notes to the Consolidated Financial Statements in our 2020 Annual Report on Form 10-K for more details.