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Note 4 - Acquisitions
9 Months Ended
Sep. 30, 2021
Notes to Financial Statements  
Business Combination Disclosure [Text Block]

4. Acquisitions

 

Our 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.

 

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 and services, consolidation of manufacturing facilities, and the leveraging of our existing administrative infrastructure.

 

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. Our assumptions associated with these Level 3 valuations are discussed below and in Note 13 to these financial statements.

 

    Artegraft Biologic Grafts

 

On June 22, 2020, we entered into an Asset Purchase Agreement (Artegraft APA) to acquire the bovine carotid artery graft business from Artegraft, Inc., which, subsequent to the closing, changed its name to Accidentals, Inc, (Artegraft, Inc.). Under the terms of the Artegraft APA, we agreed to pay Artegraft, Inc. a total of up to $90.0 million for the purchase of substantially all of the assets related to its business of manufacturing, marketing, sale and distribution of bovine carotid artery grafts (the Products), other than specifically identified excluded assets. The acquired assets included inventory, accounts receivable, machinery and equipment, intellectual property, permits and approvals, data and records, and customer and supplier information. At closing, $72.5 million of the purchase price was paid to Artegraft, Inc. and other parties as specified in the Artegraft APA, including $7.5 million into an escrow account. The escrow amount is to be held until December 31, 2021 to cover any potential claims against LeMaitre or Artegraft, Inc., after which it will be released to Artegraft, Inc. by mutual consent of the parties.

 

Three earn-out payments of $5,833,333 each are potentially due to Artegraft, Inc. under the Artegraft APA depending on the achievement of specified revenue targets, as follows:

 

 

$5.8 million upon final determination that 20,000 units of the Product have been sold to third parties from January 1, 2021 to December 31, 2021;

 

 

$5.8 million upon final determination that 24,000 units of the Product have been sold to third parties from January 1, 2022 to December 31, 2022; and

 

 

$5.8 million upon final determination that 28,800 units of the Product have been sold to third parties from January 1, 2023 to December 31, 2023.

 

The Artegraft APA includes a catch-up feature on the earn-outs such that, at the end of the three-year period, if the sum of the unit sales for all three years is greater than or equal to 58,240 unit sales (80% of the combined individual-year targets), Artegraft, Inc. will receive a “catch-up payment” in an amount equal to (a) $17,500,000 times a fraction, the numerator of which is the aggregate number of unit sales for the three-year period, and the denominator of which is 72,800 less (b) any individual-year earn-out previously paid. We recorded this liability at a fair value of $0.4 million to reflect management’s estimate of the likelihood of achieving these targets, as well as the time value of money until payment.

 

On the date of acquisition, the Company allocated the consideration given to the individual assets acquired and the liabilities assumed based on a preliminary estimate of their fair values.   During the three months ended September 30, 2020, the Company obtained and considered additional information related to the assets acquired and liabilities assumed, and recorded measurement period adjustments to the allocation of the purchase price.

 

  

Allocated

 
  

Fair Value

 
  

(in thousands)

 

Inventory

 $3,859 

Accounts receivable

  1,789 

Equipment and supplies

  1,140 

Accounts payable and other

  (53)

Intangible assets

  39,056 

Goodwill

  27,115 
     

Purchase price

 $72,906 

 

The goodwill results from expected synergies of combining the acquired products and customer information to our existing operations, and is deductible for tax purposes over 15 years.

 

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

 

 

  

Allocated

  

Estimated

 
  

Fair Value

  

Useful Life (years)

 
  

(in thousands)

     

Customer relationships

 $20,310   15.0 

Intellectual property

  16,449   10.0 

Non-compete agreement

  104   5.0 

Tradenames

  2,193   10.0 
         

Total intangible assets

 $39,056     

 

The weighted-average amortization period of the acquired intangible assets was 12.6 years.

 

 

     CardioCel and VascuCel Biologic Patches

 

On October 11, 2019 (the Closing Date), we entered into an asset purchase agreement (Admedus APA) to acquire the biologic patch business assets and a related technology license from Admedus Ltd (now known as Anteris Technologies Ltd) and various of its subsidiaries (collectively, Admedus). The biologic patch business consists of the CardioCel and VascuCel product lines, which are manufactured in a manner intended to reduce the risk of calcification. The products are sold worldwide. On the same date, the parties entered into a Transition Services Agreement (TSA) under which Admedus will manufacture and supply LeMaitre with inventory for a period of up to three years, unless extended in writing by both parties. In August 2021, the term of this arrangement was extended through July 11, 2023.

 

Under the Admedus APA we agreed to pay Admedus a total of up to $15.3 million for the purchase of substantially all of its biologic patch business assets, other than specifically identified excluded assets, plus $8.0 million for the technology license. The acquired assets (in combination with the license) included inventory, intellectual property, permits and approvals, data and records, and customer and supplier information, as well as a small amount of machinery and equipment. At closing, $14.2 million of the purchase price was paid to Admedus. Shortly thereafter another $0.3 million was paid in connection with delivery of audited financial statements of the acquired business to LeMaitre. Additional payments of $0.7 million are due within 15 days of the first and third anniversaries of the closing date; the first payment was made in October 2020. Additional contingent consideration was or may be payable as follows:

 

 

$2.5 million if revenues in the first 12-month period following the Closing Date exceed $20 million, or, $1.2 million if revenues in the first 12-month period following the Closing Date exceed $15 million (this milestone was not met and accordingly no payment was made);

 

$2.5 million if revenues in the second 12-month period following the Closing Date exceed $30 million, or, $1.2 million if revenues in the second 12-month period following the Closing Date exceed $22.5 million (this milestone was not met and accordingly no payment was made);

 

$0.5 million if, by the first anniversary of the Closing Date, Admedus extends the shelf life of the products from 36 months to at least 60 months (this milestone was not met and accordingly no payment was made); and

 

$2.0 million within 15 days following LeMaitre’s receipt of a CE mark under MDR regulations on all acquired products (the Third Holdback Amount).

 

This contingent consideration of $7.5 million was initially valued in total at $2.0 million and is being re-measured each reporting period until the payment requirement ends, with any adjustments reported in income from operations.

 

During the quarter ended September 30, 2021, the Company entered into an amendment to the Admedus APA. Under the amendment, the Third Holdback Amount, less a deduction for certain expenses incurred by LeMaitre in order to achieve CE mark certification, will be paid as follows: 75% within 15 days following LeMaitre’s receipt of a CE mark under MDR regulations for CardioCel products, and 25% within 15 days following LeMaitre’s receipt of a CE mark under MDR regulations for VascuCel products. During the quarter ended September 30, 2021 we recorded a reduction to the liability of $0.5 million, with the offset recorded in income from operations, to reflect our estimate of costs to be deducted from the Third Holdback Amount in connection with this amendment.

 

During the quarter ended September 30, 2020, we recorded a $1.3 million adjustment to goodwill with an offsetting adjustment to deferred income taxes to reflect the difference between book basis and tax basis of the technology license. The following table summarizes the purchase price allocation:

 

  

Allocated

 
  

Fair Value

 
  

(in thousands)

 

Inventory and other

 $1,343 

Deferred tax assets

  1,345 

Intangible assets

  8,725 

Goodwill

  5,999 
     

Purchase price

 $17,412 

 

The goodwill results from expected synergies of combining the acquired products and customer information to our existing operations, and is deductible for tax purposes over 15 years.

 

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

 

      

Weighted

 
  

Allocated

  

Average

 
  

Fair Value

  

Useful Life (years)

 
  

(in thousands)

     

Customer relationships

 $5,562   12.0 

Intellectual property

  2,335   8.0 

Non-compete agreement

  361   5.0 

Tradenames

  467   8.0 
         

Total intangible assets

 $8,725     

 

The weighted-average amortization period of the acquired intangible assets was 10.4 years.

 

     Tru-Incise Valve Cutter

 

On July 12, 2019 (the Closing Date), we entered into an agreement with UreSil, LLC to purchase the remaining assets of their Tru-Incise valve cutter business (since rebranded as Eze-Sit), including distribution rights in the United States. We also entered into a TSA under which UreSil, LLC continued to manufacture the acquired products for us for a specified time, until we transitioned the full manufacturing process to our Burlington, Massachusetts facilities. This manufacturing transfer is now complete.

 

The purchase price for the acquired assets, which included inventory, machinery and equipment, intellectual property, and customer and supplier information, was $8.0 million. Of this amount, $6.8 million was paid on the Closing Date, with three follow-on payments of $0.4 million each due on the first, second and third anniversaries of the Closing Date.  The deferred amounts totaling $1.2 million were recorded at an acquisition-date fair value of $1.1 million using a discount rate of 4.19% to reflect the time value of money between the acquisition date and the payment due dates. There are no contingencies associated with these holdback payments, although they may be reduced for certain post-closing claims. The first payment was made without adjustment in July 2020. The second payment was made without adjustment in July 2021.

 

The following table summarizes the purchase price allocation: 

 

  

Allocated

 
  

Fair Value

 
  

(in thousands)

 

Inventory

 $276 

Equipment and supplies

  70 

Intangible assets

  4,844 

Goodwill

  2,748 
     

Purchase price

 $7,938 

 

The goodwill results from expected synergies of combining the acquired products and customer information to our existing operations, and is deductible for tax purposes over 15 years.

 

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

 

      

Weighted

 
  

Allocated

  

Average

 
  

Fair Value

  

Useful Life (years)

 
  

(in thousands)

     

Customer relationships

 $3,945   13.0 

Intellectual property

  563   7.0 

Non-compete agreement

  233   5.0 

Tradenames

  103   7.0 
         

Total intangible assets

 $4,844     

 

The weighted-average amortization period of the acquired intangible assets was 11.8 years.