3. Business Combinations

PocketSonics, Inc. (“PocketSonics”)

In April 2010, we entered into an agreement with PocketSonics, Inc., a privately held ultrasound technology company based in Charlottesville, Virginia, which granted us an exclusive license to certain ultrasound technology owned or controlled by PocketSonics and a ten percent (10%) equity interest in PocketSonics. The equity investment was recorded as in-process research and development (“IPR&D”) of $1.9 million. Over the last three years, we have been collaborating with PocketSonics to develop patented ultrasound technology to enable the acceleration of high acuity guided procedures to lower cost point-of-care settings and other technical applications. On September 20, 2013, we acquired all of the remaining stock of PocketSonics. The purchase price includes base consideration of $11.1 million paid in cash at closing, fair value of contingent consideration of $1.9 million, and revaluation of the initial equity investment. We undertook this acquisition to further strengthen our competitive position in procedure guidance for point-of-care and other advanced guidance applications. The acquisition was funded from our existing cash on hand and has been accounted for as an acquisition of a business.

The fair value of assets acquired and the liabilities assumed were based on estimates at the acquisition date. The following table summarizes the estimated fair values of the separately identifiable assets acquired and liabilities assumed as of September 20, 2013:


(in millions)
Cash	$	0.5
Goodwill		6.9
IPR&D		11.5

Total assets acquired		18.9
Accounts payable and accrued expenses		(0.3	)
Deferred taxes		(4.1	)

Total liabilities assumed		(4.4	)

Total purchase price	$	14.5

In determining the fair value, we considered, among other factors, market participants’ intentions to use the acquired assets and the historical and estimated future demand for PocketSonics products and services. We recognized an IPR&D asset of $11.5 million. The fair value of the asset was determined by a probability adjusted cash flow analysis. This intangible asset is currently an indefinite-lived asset and is subject to our annual impairment testing process. We expect to begin amortizing the IPR&D asset over the product life cycle once production of the product begins, which is expected within the next six to eighteen months. We anticipate that the amortization period of the IPR&D asset to be approximately 10 years.

In connection with this acquisition, we recorded a fair value contingent consideration obligation of $1.9 million with potential exposure of up to $3.0 million payable upon the achievement of certain milestones relating to the PocketSonics technology. The contingent earn out payments to the sellers of PocketSonics would be met upon commercial launch and a volume sales target. The $1.9 million fair value was estimated through a valuation model that incorporates probability adjusted assumptions relating to the achievement of these milestones and the likelihood of us making payments. This fair value measurement is based upon significant inputs not observable in the market and therefore represents a Level 3 input measurement. Subsequent changes in the fair value of this obligation will be recognized as adjustments to contingent consideration liability and reflected within our condensed consolidated statement of operations within general and administrative operating expenses. For additional information related to the fair value of this obligation, please refer to Note 8. Fair Value Measurements.

We also recorded a goodwill asset of $6.9 million, representing the value of the opportunity of further strengthening our competitive position in procedure guidance for point-of-care and other advanced guidance applications. The goodwill will not be deductible for tax purposes.

We recognized a loss of $0.5 million related to our 10% pre-acquisition equity interest, which is reflected as a component of other expense, net within our condensed consolidated statement of operations for the three months ended October 31, 2013.

During the three months ended October 31, 2013, we incurred acquisition costs of approximately $0.1 million which consisted primarily of legal and due diligence expenses that are included in our general and administrative expenses in our condensed consolidated statement of operations.

Ultrasonix Medical Corporation (“Ultrasonix”)

On March 1, 2013, we completed our acquisition of all of the outstanding equity securities of Ultrasonix Medical Corporation, a Nevada Corporation, whose principal assets included customer lists and intangibles related solely to sales destined to the U.S. On March 2, 2013, we completed our acquisition of all of the outstanding equity securities of Ultrasonix Medical Corporation, a Canadian Corporation, pursuant to a “plan of arrangement” under Canadian law. Ultrasonix is a supplier of advanced ultrasound systems for point-of-care and general imaging applications. We undertook the acquisition to accelerate our expansion into the point-of-care ultrasound market. The purchase price, net of cash acquired, was $79.9 million. The acquisition was funded from our existing cash on hand and has been accounted for as an acquisition of a business.

The fair value of assets acquired and the liabilities assumed were based on estimates as of the acquisition date. The fair value measurements of inventory, intangibles, property, plant and equipment and deferred revenue were based upon significant inputs not observable in the market and therefore represent fair value measurements based on Level 3 inputs. The purchase accounting was finalized during fiscal year 2014. The following table summarizes the purchase price allocation that includes the estimated fair values of the separately identifiable assets acquired and liabilities assumed as of March 2, 2013:


(in millions)
Cash		$	0.4
Accounts receivable (A)			6.5
Inventory (B)			9.4
Prepaids and other assets			2.9
Property, plant, and equipment			0.3
Goodwill			48.2
Intangible assets:
Developed technology (weighted-average useful life of 10 years)	5.9
Customer relationships (weighted-average useful life of 10.6 years)	18.5
Tradename (estimate useful life of 2 years)	0.9

Total intangible assets			25.3
Other assets			0.1

Total assets acquired			93.1
Accounts payable and accrued expenses			(5.4	)
Deferred revenue (B)			(0.8	)
Accrued warranty			(1.1	)
Debt			(0.8	)
Deferred taxes			(4.7	)

Total liabilities assumed			(12.8	)

Total purchase price		$	80.3

(A)	The gross amount due is $8.7 million, of which $2.2 million is expected to be uncollectible. We did not acquire any other class of receivables other than trade receivables as a result of the acquisition of Ultrasonix.

(B)

The inventory fair value adjustment of $3.7 million associated with the acquisition was fully amortized as of October 31, 2013. The deferred revenue adjustment of $0.8 million associated with the acquisition will be amortized over 4.5 years. The inventory fair value and deferred revenue adjustments were recognized in product cost of sales and product revenue in our condensed consolidated statement of operations, respectively.

During the three months ended October 31, 2013, we incurred acquisition costs of approximately $2.4 million primarily related to intangible amortization expense of $1.9 million and inventory step up of $0.5 million that are included in our general and administrative expenses and cost of sales, respectively, in our condensed consolidated statement of operations.

Pro Forma Financial Information

The following unaudited pro forma information for the first three months of fiscal years 2014 and 2013 presents consolidated information as if both the PocketSonics and the Ultrasonix acquisitions occurred on August 1, 2012, which is the first day of our fiscal year 2013:


(in millions, except per share)	For the Three Months Ended October 31
	2013			2012
Net revenue	$	110.1		$	128.1
Net (loss) income	$	(4.4	)	$	3.8
Net (loss) income per share, basic	$	(0.36	)	$	0.31
Net (loss) income per share, diluted	$	(0.36	)	$	0.30