Note 9 - Acquisition

9 Months Ended

Sep. 30, 2014

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

9. Acquisition

On July 31, 2014 (“date of the acquisition”), the Company acquired substantially all of the assets of Boulder, a privately owned company developing immunology-based assays for rheumatology and infectious diseases. The assets acquired primarily relate to assays for Lyme disease and gout and an assay to help select biologics for autoimmune disease based on monitoring and prognosis of drug response that was acquired in conjunction with the Boulder acquisition. As part of the transaction, Boulder transferred to the Company all shares of capital stock in its wholly-owned subsidiary, Boulder Diagnostics Europe GmbH, such that the Company has become the sole owner of Boulder Diagnostics Europe GmbH.

The terms of the purchase agreement provided for an upfront payment of $1.7 million and contingent purchase price consideration consisting of future potential milestone payments totaling up to $6.1 million in respect of the Lyme disease and gout assays at any time on or prior to July 31, 2024. The milestone payments consist of up to $400,000 for the completion of studies related to acquired technologies, up to $700,000 for the development of diagnostic test kits, $500,000 for the first patient enrolled in an Institutional Review Board approved study, up to $1.5 million for the issuance of patents, and up to $3.0 million for approvals or clearances by the U.S. Food and Drug Administration. The Company has determined that this liability is a Level 3 fair value measurement within the FASB’s fair value hierarchy and the fair value has been estimated to be $1.2 million on the date of acquisition based on significant assumptions, including the probabilities of milestone occurrence, the expected timing of milestone payments, and a discount rate of 15%. Such liability is adjusted to fair value at each reporting date, with the adjustment reflected in general and administrative expenses. See Note 2 (Fair value measurement) for information pertaining to changes in the fair value of this liability.

The acquisition of Boulder was accounted for under the acquisition method of accounting and the purchase price allocation was provisionally prepared during the third quarter of 2014. While the Company is close to finalization of the purchase price accounting, it has recorded provisional amounts for all of the assets acquired and the liabilities assumed, based upon their estimated fair values at the date of the business acquisition. These provisional amounts may be adjusted as necessary during the measurement period (up to one year from the acquisition date) while the accounting is finalized. Total consideration was (in thousands):

Cash consideration	$	1,724
Estimated fair value of contingent consideration		1,247
Total consideration transferred	$	2,971

$183,200 of the cash consideration has been placed in an escrow account for a period of 24 months as security for any undisclosed liabilities and as indemnification for certain items. The Company paid approximately $181,000 in transaction costs associated with this transaction, which is included in general and administrative expense in the statement of operations.

The following table summarizes the purchase price of the Boulder acquisition, the fair value of identified assets acquired and liabilities assumed at the acquisition date (in thousands):

Assets acquired:
Cash	$	8
Accounts receivable		15
Inventory		40
Prepaid expenses and other		12
Property and equipment		359
In-process research and development		2,627
Total assets acquired		3,061
Liabilities assumed:
Accounts payable		(97	)
Accrued liabilities		(14	)
Other current liabilities		(34	)
Total liabilities assumed		(145	)
Net assets acquired		2,916
Add: goodwill		55
Total consideration transferred	$	2,971

On the date of the acquisition the fair value of IPR&D acquired was determined to be $2.6 million ($1.8 million for the Lyme disease assay, $0.5 million for the assay to help select biologics for autoimmune disease based on monitoring and prognosis of drug response that was acquired in conjunction with the Boulder acquisition, and $0.3 million for the gout assay) using the excess earnings method with significant inputs, including estimates of the timing and cost required for product approval, revenue growth, gross margin, operating expenses and a 15% discount rate, that are not observable. We consider the fair value of IPR&D to be a Level 3 fair value asset due to the significant estimates and assumptions used by management in establishing the estimated fair value.

Goodwill and IPR&D are indefinite-lived intangible assets and are not amortized. Rather, they are reviewed for impairment at least annually. There was no evidence of any impairments at September 30, 2014 and there were no impairment charges during the quarter ended September 30, 2014.

Actual results of operations of Boulder are included in the unaudited condensed consolidated interim financial statements from the date of the acquisition, including revenues in the amount of $17,000 for the quarter ended September 30, 2014 and losses from operations of $100,000 for the quarter ended September 30, 2014. The functional currency for Boulder in Germany is the Euro.

Pro Forma Information:The unaudited pro forma condensed consolidated statement of operations of the Company, set forth below, gives effect to the Company’s acquisition of Boulder, using the acquisition method as if it occurred on January 1, 2013. These amounts are not necessarily indicative of the consolidated results of operations for future years or actual results that would have been realized had the acquisition occurred as of the beginning of each such year:

	Pro Forma
	Three months ended September 30,						Nine months ended September 30,
(in thousands, except share and per share data)	2014			2013			2014			2013
Total revenues	$	13,335		$	10,772		$	37,459		$	28,663
Net loss	$	(5,987	)	$	(3,508	)	$	(15,707	)	$	(6,204	)
Net loss per share—basic and diluted	$	(0.35	)	$	(1.50	)	$	(0.91	)	$	(2.75	)
Weighted average shares outstanding—basic and diluted	$	17,333,441		$	2,331,990		$	17,300,881		$	2,256,494