Note 2 - Business Combination

12 Months Ended

Dec. 31, 2021

Notes to Financial Statements

Business Combination Disclosure [Text Block]

2. BUSINESS COMBINATION

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”), pursuant to a Share Purchase Agreement dated the same date among Buyer, EMS and the direct and indirect owners of EMS. EMS, based in Singapore, is a provider of joint development medical device manufacturing services for complex catheter applications.

In addition, EMS 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 Consolidated Balance Sheets.

The total purchase price of $11,815 consisted of a cash payment paid at closing of $7,128, including a post-closing working capital adjustment of $291, the issuance of 80 thousand shares of the Company’s common stock valued at $982 issued at closing, which shares will be held in an escrow account for a period of 18 months to resolve any post-closing claims by the Buyer, as well as a liability for contingent consideration of $3,414. The liability for contingent consideration consisted of a cash payment of $500 payable in the event that regulatory approval in Japan was obtained for a particular product within twelve months of closing, an earn-out payment of between $333 and $1,000 if EMS has net revenues ranging from $9.0 million to $11.0 million during the first year after closing, and additional earn-out payments equal to 28% of all EMS net revenues arising from the sale of certain products or to certain customers for each of the first three years after closing. The liability for contingent consideration is a fair value measurement based on various level 3 inputs using a scenario-based method. The key assumptions included forecasts of future revenues and the selection of the discount rate for the contingent consideration liability. The liability for contingent consideration is subject to fair value adjustments each reporting period that will be recognized through the statement of operations.Japan regulatory approval resulted in a cash payment of $500 to the sellers under the EMS purchase agreement during the fourth quarter of 2020. In addition, a cash payment of $1,000 was made to the sellers in July 2021 for meeting certain first year revenue goals. As of December 31, 2021 the remaining contingent consideration liability consisted of 28% of all EMS net revenues arising from the sale of certain products or to certain customers for the second and third year periods.

At the time of the acquisition, May 18, 2020, certain Level 3 inputs were used to determine the fair value measurement of the contingent consideration liability. These included revenue volatility of 20%, weighted average cost of capital of 25% and a discount rate of 3.5%. None of these inputs have changed as of December 31, 2021. Significant increases or decreases in these inputs in isolation could result in a significant impact on our 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, 2019	$	-
Addition for acquisition of Emerald Medical Services		3,414
Change in fair value		660
Less payments		(500	)
Carrying amount at December 31, 2020	$	3,574
Change in fair value		(739	)
Less payments		(1,052	)
Carrying amount at December 31, 2021	$	1,783

Since the acquisition, the Company has paid $1,552 of the original contingent consideration liabilities. As of December 31, 2021, approximately $1,783 remains contingent on future performance. During the period ended December 31, 2020, we recorded an increase of $660 to the fair value of contingent consideration due to forecasted revenue exceeding certain sales thresholds during the first year after closing. For the period ended December 31, 2021, we recorded a $739 change in fair value of contingent consideration within other operating expenses as a decrease in the fair value of future estimated payments due to a decrease in revenue forecasts tied to the contingent consideration.

In connection with the acquisition, the Company recorded acquisition costs of $493 for the year ended December 31, 2020 related to legal, professional fees and other miscellaneous costs. These costs are recorded within acquisition costs within the Consolidated Statements of Operations.

Our Consolidated Statements of Operations for the year ended December 31, 2021 include revenues of $14,573 and net income of $1,212 attributable to EMS and EES. Our Consolidated Statements of Operations for the year ended  December 31, 2020 include revenues of $7,361 and a net loss of ($30) attributable to EMS and EES for the period from May 19 through December 31, 2020.

The final purchase price allocation of the fair value of the assets acquired and liabilities assumed is included in the table below. Cash consideration of $7,128 was paid at closing, including a post-closing working capital adjustment of $291, the issuance of 80 shares of the Company's common stock valued at $982 issued at closing, which resulted in preliminary goodwill of $4,041. We recorded identifiable assets acquired and liabilities assumed at their estimated fair value on the acquisition date and we had up to one year from the acquisition date to finalize the purchase price allocation. An intangible asset of $6,400 was recorded related to the value of identifiable customer relationships acquired. This intangible is being amortized over an 8-year useful life. Since the acquisition date, we recorded purchase accounting adjustments as increases to goodwill of $122 and $159 in 2020 and 2021 respectively, within our Consolidated Balance Sheets. The final goodwill generated from the acquisition of $4,322 represents the benefits of increased operating scale and growth opportunities through currently unidentifiable customers. The goodwill balance is not amortizable for tax purposes.

The final purchase price was allocated as follows:

Current assets	$	3,161
Machinery and equipment		360
Intangible assets		6,400
Goodwill		4,322
Noncurrent assets		169
Current liabilities		(1,105	)
Noncurrent liabilities		(1,492	)
Total consideration paid	$	11,815