2. Acquisitions and Divestitures

Acquisitions are accounted for using the acquisition method and the acquired companies’ results have been included in the accompanying consolidated financial statements from their respective dates of acquisition. In each case for the acquisitions disclosed below, pro forma information assuming the acquisition had occurred at the beginning of the earliest period presented is not included as the impact is immaterial.

XenoSure Manufacturing and Distribution Rights

In October 2012, we entered into an asset purchase agreement (the Neovasc Agreement) with Neovasc, Inc. and its subsidiary, Neovasc Medical Inc. (collectively Neovasc) to acquire the manufacturing and distribution rights of the XenoSure biologic vascular patch. Previously, we were the exclusive distributor of the XenoSure biologic vascular patch through January 26, 2016 and held an option to purchase the manufacturing and distribution rights. Assets acquired in October 2012 include intellectual property, manufacturing know-how, and a five year non-compete agreement. Other provisions of the Neovasc Agreement include transitional assistance from Neovasc and mutual indemnification for losses arising out of or relating to certain breaches of, and misrepresentations under, the Neovasc Agreement. Additionally, we entered into a supply agreement with Neovasc while we transition manufacturing to our Burlington facility.

The purchase price for this acquisition was $4.6 million. We paid Neovasc $4.3 million at the closing of the acquisition. The remaining $0.3 million was paid in October 2013. We accounted for the acquisition as a business combination. We recorded $2.8 million of intangible assets and $1.8 million of goodwill. The weighted-average amortization period for the acquired intangible assets as of November 1, 2012 was 12.0 years. The goodwill is deductible for tax purposes over 15 years.

Clinical Instruments International, Inc.

In July 2013, we entered into an asset purchase agreement with Clinical Instruments International, Inc. (Clinical Instruments) to acquire substantially all the assets of Clinical Instruments for $1.1 million. We paid $0.9 million at the closing and paid the remaining $0.2 million in October 2014. We accounted for the acquisition as a business combination. Assets acquired include inventory and intellectual property. We recorded $0.2 million of inventory, $0.3 million of intangible assets and $0.6 million of goodwill. The weighted-average amortization period for the acquired intangible assets as of July 31, 2013 was 5.7 years. The goodwill is deductible for tax purposes over 15 years.

InaVein, LLC

In August 2013, we entered into an Asset Purchase Agreement with InaVein, LLC (InaVein) to acquire substantially all the assets of InaVein for $2.5 million and potential acquisition-related contingent consideration totaling $1.4 million in 2014 and 2015 dependent on the sales performance of the acquired business and the timing of regulatory approval in China. We paid $2.1 million at the closing and the remaining $0.4 million fixed payment was made in September 2014. We accounted for the acquisition as a business combination. Assets acquired include receivables, inventory, equipment, and intellectual property. Liabilities assumed include payables and service contracts.

 

The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of the acquisition:

 

		Allocated
		Fair Value
		(in thousands)
Current assets		$	670
Property and equipment, net			154
Intangible assets			1,143
Goodwill			668
Total assets acquired			2,635
Total liabilities assumed			(100	)
		$	2,535

The goodwill of $0.7 million will be deductible for tax purposes over 15 years.

Of the $1.1 million of acquired intangible assets, the following table reflects the allocation of the acquired intangible assets and related estimated useful lives:

 

		Allocated Fair Value				Weighted Average Useful Life
		(in thousands)
Non-compete agreement		$	70				5.0 years
Tradename			163				8.0 years
Technology			354				6.0 years
Customer relationships			556				7.0 years
Total intangible assets		$	1,143

The contingent consideration was initially valued at the date of acquisition and is remeasured each reporting period until the contingency is resolved. Based upon stronger than expected sales to China, we recorded an increase of $0.1 million related to the contingent consideration, which was dependent on the sales performance of the acquired business in the first year following the closing of the transaction as a charge to general and administrative expense in 2014. In October 2014, we paid $0.2 million related to the first sales related milestone. Neither the milestone related to the timing of the regulatory approval in China nor the second sales milestone was achieved.

Xenotis Pty Ltd

In August 2014, we entered into a stock purchase agreement with the shareholders of Xenotis Pty Ltd (Xenotis) to acquire all of the capital stock of Xenotis for $6.7 million with a mechanism for a purchase price adjustment based on the net tangible assets of Xenotis at closing. Xenotis is the parent company of Bio Nova International, the manufacturer and marketer of the Omniflow II biosynthetic vascular graft for lower extremity bypass and AV access. We paid $5.1 million at the closing and the remaining $1.4 million was paid in August 2015. The net tangible asset purchase price adjustment of $0.2 million was paid in November 2014. We accounted for the acquisition as a business combination. Assets acquired include receivables, inventory, equipment, a building, and intellectual property. Liabilities assumed include payables and debt.

 

The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of the acquisition:

 

		Allocated
		Fair Value
		(in thousands)
Current assets		$	2,110
Property and equipment, net			2,054
Intangible assets			1,794
Goodwill			2,475
Total assets acquired			8,433
Total liabilities assumed			(1,731	)
Purchase price		$	6,702

Total liabilities assumed of $1.7 million include $1.1 million of assumed debt, which we paid in full in August 2014. The purchase accounting is complete.

The goodwill of $2.5 million will not be deductible for tax purposes. In addition, we acquired deferred tax assets of $2.4 million which consist primarily of net operating loss carry-forwards and capital loss carry-forwards. We assessed the need for a valuation allowance on the acquired deferred tax assets in Australia. Our assessment considered evidence such as current profitability, utilization of certain available tax assets and liabilities, and projected future earnings. Based on this evidence, we concluded that it was more likely than not that we would not be able to utilize the deferred tax assets in Australia. We recorded a full valuation allowance on these deferred tax assets.

The following table reflects the allocation of the acquired intangible assets and related estimated useful lives:

 

		Allocated Fair Value				Weighted Average Useful Life
		(in thousands)
Non-compete agreement		$	135				5.0 years
Tradename			142				7.0 years
Technology			1,465				7.0 years
Customer relationships			52				7.0 years
Total intangible assets		$	1,794

In September 2014, we entered into definitive agreements with eight former Xenotis distributors in Europe to terminate their distribution of our Omniflow II biosynthetic vascular grafts for $1.3 million. We paid approximately $1.1 million in 2014 with the remainder due in 2015. We recorded $0.4 million of inventory and $0.9 million of intangible assets. We allocated the payment to the tangible and intangible assets acquired based on the estimated fair value of each of these elements to the transactions. The weighted-average amortization period for the acquired intangible assets is 5.0 years.

Angioscope

In September 2014, we entered into an asset purchase agreement with Applied Medical Resource Corporation (Applied Medical) to acquire substantially all the assets related to Applied Medical’s angioscope product line for $0.4 million. We paid $0.3 million at closing and the remaining $0.1 million is payable in December 2015. We accounted for the acquisition as a business combination. Assets acquired include inventory, property and equipment, and intellectual property.

 

The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of the acquisition:

 

		Allocated Fair Value
		(in thousands)
Inventory		$	26
Property and equipment, net			38
Intangible assets			276
Goodwill			80
Total assets acquired			420
Total liabilities assumed			—
Purchase price		$	420

The goodwill of $0.1 million is deductible for tax purposes over 15 years.

The following table reflects the allocation of the acquired intangible assets and related estimated useful lives:

 

		Allocated Fair Value				Weighted Average Useful Life
		(in thousands)
Non-compete agreement		$	3				2.0 years
Tradename			28				7.0 years
Technology			163				7.0 years
Customer relationships			82				9.0 years
Total intangible assets		$	276

Tru-Incise Valvulotome

In May 2015, we entered into an asset purchase agreement with UreSil, LLC (UreSil) to acquire the production and distribution rights of UreSil’s Tru-Incise valvulotome for sales outside the United States for a purchase price of approximately $1.4 million. We paid $1.1 million with the remaining $0.3 million payable at various points in 2016 and 2017. We accounted for the acquisition as a business combination. Assets acquired include inventory and intellectual property. We did not assume any liabilities. The purchase accounting is complete.

The following table summarizes the purchase price allocation at the date of the acquisition:

 

		Allocated Fair Value
		(in thousands)
Inventory		$	88
Intangible assets			545
Goodwill			742
Purchase price		$	1,375

The goodwill is deductible for tax purposes over 15 years.

 

The following table reflects the allocation of the acquired intangible assets and related estimated useful lives:

 

		Allocated Fair Value				Weighted Average Useful Life
		(in thousands)
Non-compete agreement		$	120				5.0 years
Tradename license			17				3.0 years
Technology			391				7.0 years
Customer relationships			17				3.0 years
Total intangible assets		$	545

Other Items

Following the Tru-Incise valvulotome acquisition, we entered into definitive agreements with eight UreSil distributors to terminate their distribution of the Tru-Incise valvulotome for aggregated termination fees of $0.2 million. We recorded approximately $0.2 million of intangible assets with a weighted-average amortization period of 3.0 years.

In August 2015, we entered into a definitive agreement with Grex Medical Oy (Grex) our then-distributor in Finland in order to terminate its distribution of our products and we began selling direct to hospitals in Finland as of January 1, 2016. The agreement required us to pay approximately $0.2 million in exchange for the purchase of customer lists and a non-compete agreement.

Our acquisitions have historically been made at prices above the fair value of the acquired identifiable assets, resulting in goodwill, due to expectations of synergies that will be realized by combining businesses. These synergies include the use of our existing sales channel to expand sales of the acquired businesses’ products, consolidation of manufacturing facilities, and the leveraging of our existing administrative infrastructure.

The UnBalloon Divestiture

In July 2015, we entered into an asset sales agreement with Merit Medical Ireland Limited to sell our inventory, intellectual property, and customer lists associated with our The UnBalloon non-occlusive modeling catheter product line for $0.4 million which was recognized as a gain on divestiture in the third quarter of 2015. During the year ended December 31, 2014, we had recognized an impairment charge of $0.2 million on The UnBalloon non-occlusive modeling catheter product line. Additionally, in 2014 we recognized a $0.3 million charge to cost of sales related to the non-occlusive modeling catheter inventory.

The fair market valuations associated with these transactions fall within Level 3 of the fair value hierarchy, due to the use of significant unobservable inputs to determine fair value. The fair value measurements were calculated using unobservable inputs, primarily using the income approach, specifically the discounted cash flow method. The amount and timing of future cash flows within our analysis was based on our due diligence models, most recent operational budgets, long range strategic plans and other estimates.