Purchase Consideration | Valuation Technique | Fair Value Hierarchy | Discount Rate | Purchase Consideration as at Dec 31, 2017 | |
Pinnacle earn-out (a) | Discounted cash flows | Level 3 | 19% | 3,913 | |
Pinnacle annual payments (b) | Present value | Level 2 | 19% | 4,471 | |
Total purchase consideration | 8,384 | ||||
Less: current portion | (1,835 | ) | |||
Long-term portion | 6,549 | ||||
(a) | As part of the consideration for the acquisition of Pinnacle Biologics Inc. (“Pinnacle”), the Company recorded a contingent consideration liability for its obligation to make additional payments to the former owners of Pinnacle. The liability represents the fair value of earn-out payments calculated as 15% of worldwide sales of Photofrin® in excess of $25,000 over the 10 calendar years following the Company’s acquisition of Pinnacle. The expected payment is determined by considering the possible scenarios of sales thresholds and the amount to be paid under each scenario and the probability of each scenario. The estimated fair value of the contingent consideration would decrease if the annual gross profit growth rates were lower and would also decrease if the market representative interest rate was lower. |
(b) | As part of the consideration for the acquisition of Pinnacle, the Company is obligated to make ten annual payments of $1,000, with the first payment made on December 31, 2014. The obligation is subordinated and is not subject to interest. The obligation has been recorded at the present value of required payments. The estimated fair value would decrease if the market representative interest rate was higher. The Company and the vendors of Pinnacle agreed to defer payment of the December 31, 2017 amount until March 31, 2018 as a result of the CBCA proceedings described in Note 2. |