Quarterly report pursuant to Section 13 or 15(d)

Note 2 - Acquisitions

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Note 2 - Acquisitions
 3 Months Ended
Sep. 30, 2016
Notes to Financial Statements  
Business Combination Disclosure [Text Block]
Note 2. Acquisitions:
 
The Company’s acquisitions have historically been made at prices above the fair value of the acquired identifiable assets, resulting in goodwill. The goodwill is due to strategic benefits of growing the Company’s product portfolio, expected revenue growth from the increased market penetration from future products and customers, and expectations of synergies that will be realized by combining the businesses. Acquisitions have been accounted for using the purchase method of accounting and the acquired companies’ results have been included in the accompanying financial statements from their respective dates of acquisition. Acquisition costs are recorded in selling, general and administrative expenses as incurred.
 
Zephyrus Biosciences, Inc.
On March 14, 2016, the Company acquired Zephyrus Biosciences, Inc. (Zephyrus) for $8 million in cash and up to $7 million in contingent consideration. Zephyrus provides research tools to enable protein analysis at the single cell level. Addressing the burgeoning single cell analysis market, Zephyrus's first product, Milo™, enables western blotting on individual cells for the first time.
 
In connection with the Zephyrus acquisition, the Company initially recorded $7.4 million of in process research and development which was not amortized. This amount was revalued to $8.3 million and converted to developed technology during the quarter. This reclassification occurred because the sale of product associated with the technology was completed during the quarter.
 
The Company will pay Zephyrus former shareholders an additional $3.5 million if and when 10 instruments are sold prior to the 3 year anniversary of the closing date (March 14, 2019). In addition, the Company will pay Zephyrus former shareholders an additional $3.5 million if and when $3 million in cumulative sales are generated within 4.5 yrs of the closing date (September 14, 2020). We have established an initial estimate of the fair value of these contingent consideration payments to be $6.9 million in total. This fair value was estimated using a Monte Carlo simulation, the significant inputs of which included projected revenues and unit sales, volatility considerations with respect to these projections, and present value discount factors.
 
The goodwill recorded as a result of the Zephyrus acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration from future products and customers. The goodwill is not deductible for income tax purposes.
 
Space Import-Export, Srl
On July 1, 2016 Bio-Techne acquired Space Import-Export, Srl (Space) of Milan, Italy for the equivalent of approximately $9 million. Space is a long and trusted partner of Bio-Techne, distributing its products since 1985 and creating a very effective and visible presence in the Italian market.
 
The goodwill recorded as a result of the Space acquisition represents the strategic benefits of the expected revenue growth from increased market penetration from future customers. The goodwill is not deductible for income tax purposes.
 
Advanced Cell Diagnostics
On August 1, 2016, Bio-Techne closed on the acquisition of ACD for approximately $250 million, net of cash received, plus contingent consideration of up to $75 million as follows:
●
$25 million can be earned if calendar year 2016 revenues equal or exceed $30 million.
●
an additional $50 million can be earned if calendar year 2017 revenues equal or exceed $45 million.
 
If the revenue hurdle related to the 2016 calendar year is not met, the $25 million can be earned if the calendar year 2017 revenue hurdle is met. If the 2016 revenue hurdle is met, and calendar year 2017 revenues exceed $40 million but are less than $45 million, a reduced earn-out payment will be made for calendar year 2017, calculated on a sliding scale.
 
Based on specifics above, management estimated the fair value of the contingent consideration payable using a Monte Carlo simulation, the significant inputs of which included projected revenues, volatility considerations with respect to these projections, and present value discount factors. This simulation resulted in a valuation of $38.2 million and $40.1 million as of the August 1, 2016 (the acquisition date) and September 30, 2016, respectively. The change of $1.9 million was recorded as an expense to selling, general, and administrative expenses during the quarter ended September 30, 2016.
 
The goodwill recorded as a result of the ACD acquisition represents the strategic benefits of growing the Company’s product portfolio and the expected revenue growth from increased market penetration from future products and customers. The goodwill is not deductible for income tax purposes.
 
The preliminary estimated fair value of the assets acquired and liabilities assumed in each acquisition, pending final valuation of intangible assets, are as follows (in thousands):
 
 
 
ACD
 
 
Space
 
 
Zephyrus
 
Current assets, net of cash
   $ 25,196     $ 2,128     $ 86  
Equipment
     2,757       159       32  
Other long-term assets
     3,812       -       -  
Intangible assets:
                        
Developed technology
     107,000       -       8,300  
Trade name
     17,000       -       -  
Customer relationships
     77,000       6,769       -  
Non-compete agreement
     200       -       -  
Goodwill
     137,594       3,100       9,378  
Total assets acquired
     370,559       12,156       17,796  
Liabilities
     3,599       1,884       54  
Deferred income taxes, net
     78,760       1,708       2,812  
Net assets acquired
   $ 288,200     $ 9,004     $ 14,930  
                         
Cash paid, net of cash acquired
   $ 250,000     $ 9,004     $ 8,030  
Fair value contingent consideration
     38,200       -       6,900  
Net assets acquired
   $ 288,200     $ 9,004     $ 14,930  
 
Tangible assets acquired, net of liabilities assumed, were stated at fair value at the date of acquisition based on management’s assessment. The purchase price allocated to developed technology, trade names, and customer relationships was based on management’s forecasted cash inflows and outflows and using a relief-from-royalty and a multi-period excess earnings method to calculate the fair value of assets purchased. The developed technology is being amortized with the expense reflected in cost of goods sold in the Condensed Consolidated Statement of Earnings and Comprehensive Income. Amortization expense related to trade names, and customer relationships is reflected in selling, general and administrative expenses in the Consolidated Statement of Earnings and Comprehensive Income. The amortization periods for intangible assets acquired in fiscal 2017 are estimated to be 15 years for developed technology, 7.5 years for trade names, 10 years for customer relationships, and 2 years for non-competes. The deferred income tax liability represents the net amount of the estimated future impact of adjustments for costs to be recognized upon the sale of acquired inventory that was written up to fair value and intangible asset amortization, both of which are not deductible for income tax purposes.
 
As previously disclosed, ACD was acquired on August 1, 2016. The unaudited pro forma financial information below summarizes the combined results of operations for Bio-Techne and ACD as though the companies were combined as of the beginning fiscal 2016. The pro forma financial information for all periods presented includes the purchase accounting effects resulting from these acquisitions except for the increase in inventory to fair value and the fair value adjustments to contingent consideration as these are not expected to have a continuing impact on cost of goods sold or selling, general and administrative expense, respectively. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of fiscal 2016.
 
 
 
 
Quarter Ended
 
 
 
September 30,
 
 
 
2016
 
 
2015
 
Net sales
   $ 131,798     $ 117,690  
Net income
     23,103       21,840