Business combination

12 Months Ended

Jul. 31, 2015

Business combination

3. Business combination

Pathfinder Therapeutics, Inc., or Pathfinder

On October 28, 2014, we acquired certain assets and assumed certain liabilities related to the surgical planning and guidance business of Pathfinder for $1.6 million, which was paid in cash at the acquisition date. The acquisition has been accounted for as an acquisition of a business.

The following table summarizes the purchase price allocation based on the fair values of the separately identifiable assets acquired and liabilities assumed as of the acquisition date:

(in millions)
Inventory and receivables				$	0.2
Goodwill					0.4
Intangible assets:
Developed technology (estimated useful life of 10 years)	$	0.7
Customer relationships (estimated useful life of 2 years)		0.3
Trade names (estimated useful life of 5 years)		0.1
Total intangible assets					1.1
Total assets acquired					1.7
Accrued liabilities		(0.1	)
Total liabilities assumed					(0.1	)
Total purchase price				$	1.6

We estimated the fair value of identifiable acquisition-related intangible assets primarily based on discounted cash flows projections that will arise from these assets. We use significant judgment with regard to assumptions used in the determination of fair value such as discount rates and the determination of the estimated useful lives of the intangible assets.

The total weighted average amortization period for the intangible assets is approximately 7.6 years. Goodwill associated with the acquisition was primarily attributable to the opportunities from the addition of Pathfinder’s product portfolio and technology which complement our suite of products. The goodwill from this acquisition will be deductible for tax purposes over the statutory 15 year period.

During fiscal year 2015, 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 Consolidated Statements of Operations.

The pro forma financial information for the year ended July 31, 2015, including revenue and net income, is immaterial, and has not been separately presented.

PocketSonics, Inc.

In April 2010, we entered into an agreement with PocketSonics, Inc., or PocketSonics, 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, or IPR&D, of $1.9 million. Since that time, we have collaborated 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 our 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.

We finalized the purchase accounting for the PocketSonics acquisition during fiscal year 2014. The following table summarizes the 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. In May 2014, we determined that the IPR&D was completed and performed a qualitative assessment and determined that there was no impairment. Accordingly, the carrying amount of the IPR&D asset was reclassified as developed technology and will be amortized over its estimated useful life of 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 payable upon commercial launch and achievement of volume sales target as defined in the asset purchase agreement. The $2.0 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 the contingent consideration liability and reflected within our Consolidated Statements of Operations within selling and marketing expenses. During fiscal year 2015, the estimated fair value of our contingent consideration obligation decreased by $0.1 million. The total fair value of our contingent consideration obligation was $2.0 million as of July 31, 2015. For additional information related to the fair value of this obligation, please refer to Note 8. Fair Value Measurements.

We recorded goodwill of $6.9 million related to the PocketSonics acquisition, representing the value of the opportunity of further strengthening our competitive position in procedure guidance for point-of-care and other advanced guidance applications. This goodwill will not be deductible for tax purposes.

Upon the acquisition of PocketSonics, 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 Consolidated Statement of Operations for fiscal year 2014.

During fiscal year 2014, we incurred acquisition costs of $0.1 million consisting primarily of legal and due diligence expenses that are included in our general and administrative expenses in our Consolidated Statement of Operations.

We have expensed $0.9 million and $1.5 million for engineering services related to PocketSonics during fiscal years 2013 and 2012, respectively, prior to our acquisition of its remaining stock.