(3)Acquisition

On August 1, 2014, MGC Diagnostics Corporation acquired 100% of the stock of Medisoft SA (“Medisoft”), through its newly established wholly-owned subsidiary, MGC Diagnostics Belgium S.P.R.L., a private limited liability company. Medisoft, based in Sorinnes, Belgium, was a privately held manufacturer of cardiorespiratory diagnostics products, with operating subsidiaries in France, Germany and Italy. The Company expects the acquisition to expand its product range and provide a platform for global expansion outside the United States.

The Company acquired Medisoft for total cash consideration of €5,780,000 ($7,745,000). In addition, at closing, MGC Diagnostics issued to the Medisoft selling shareholders warrants to purchase 168,342 shares of MGC Diagnostics common stock at a price of $7.96 per share. The Warrants have a three-year term expiring on August 1, 2017. The value of the warrants was approximately €314,000 ($421,000). The warrants were valued at $2.50 per share using the Black-Scholes model assuming an expected life of three years; risk free interest rate of 1.0%; volatility of 45.0% and dividend yield of 0%.

Of the total cash consideration, €4,067,000 ($5,449,000) was paid to the Medisoft former shareholders to purchase the Medisoft stock and €1,713,000 ($2,296,000) was used to retire existing Medisoft indebtedness.

In the quarter ended July 31, 2015, the Company adjusted the initial purchase price allocation as of the August 1, 2014 acquisition date to reflect modifications to the fair value of assets and liabilities. These revised purchase price allocations resulted primarily from two adjustments: (i) the identification of unrecorded Medisoft liabilities, and (ii) the Company’s receipt of approximately $447,000 in cash from a bank guarantee that was established as part of the July 2014 stock purchase agreement between the Company and the Medisoft selling shareholders to compensate the Company for violations of representations and warranties in the stock purchase agreement. The following table shows the revised purchase price allocation resulting from these modifications as of August 1, 2014:



(In thousands)	Prior Year Allocation Amount		Revision Amount		Revised Allocation Amount
Cash	$	101	$	—	$	101
Accounts receivable		1,079		—		1,079
Inventories		710		—		710
Prepaids and other current assets		140		545		685
Land and buildings		2,479		—		2,479
Equipment		194		—		194
Furniture and fixtures		17		—		17
Developed technology		1,081		—		1,081
Trademarks and trade names		236		—		236
Customer/distributer relationships		456		—		456
Goodwill		4,458		(409)		4,049
Deferred tax assets		—		176		176
Other non-current assets		14		—		14
Accounts payable		(1,078)		—		(1,078)
Accrued expenses		(655)		(397)		(1,052)
Deferred income		(62)		—		(62)
Deferred tax liabilities		(712)		(37)		(749)
Other non-current liabilities		(292)		122		(170)
Net Assets acquired	$	8,166	$	—	$	8,166

The following table shows the revisions to the consolidated balance sheet as of October 31, 2014:



(In thousands)		Original Consolidated Balance Sheet		Revision		Revised Consolidated Balance Sheet
Prepaid expenses and other current assets	$	1,926	$	499	$	2,425	a
Current deferred tax assets		20		(20)		—	b
Goodwill		4,196		(386)		3,810
Current portion of long-term debt		(800)		14		(786)
Other current liabilities and accrued expenses		(1,042)		(374)		(1,416)
Long-deferred income and other		(2,884)		70		(2,814)
Non-current deferred tax liabilities		(484)		137		(347)
Accumulated deficit		8,271		60		8,331
			$	—
Note a-The Balance Sheet amount was also affected by the reclassification of deferred financing fees. Note b-The Balance Sheet was also affected by the reclassification of deferred taxes to non-current.

The goodwill value that resulted from this acquisition was principally derived from the nature and quality of the products offered that are complementary to the Company’s current business, Medisoft’s reputation in the market, synergies that were expected from markets outside the United States when combined with the Company’s existing foreign operations and the competitive cost structure that the acquired operations offer. The goodwill is not deductible for tax purposes because the Company acquired 100% of the outstanding shares of Medisoft and its wholly-owned subsidiaries. No changes occurred to recorded goodwill other than as described above and the effects of currency translation in the consolidated balance sheets. Cumulative foreign exchange translation losses with respect to goodwill valuation of $725,000 and $239,000 as of October 31, 2015 and 2014, respectively, are included in accumulated other comprehensive loss as reported in the consolidated balance sheet.

For the year ended October 31, 2015 and three-month period ended October 31, 2014, Medisoft contributed $5,423,000 and $1,278,000, respectively, to consolidated revenues and had net losses of $999,000 and $508,000, respectively.

Unaudited pro forma consolidated information for the year ended October 31, 2014, assuming that this acquisition had occurred on November 1, 2013, is as follows:


(In thousands)	2014
Pro forma revenues	$	35,052

Pro forma net loss		(2,524)

Pro forma loss per share-diluted	$	(0.61)

The Company incurred $1,125,000 of costs in connection with this acquisition, which are included in the above pro forma consolidated information for the year ended October 31, 2014. In addition, the Company incurred $71,000 of debt issuance costs in fiscal 2014, which are being amortized over five years in accordance with a $4.0 million term loan the Company secured to finance the Medisoft acquisition. This amortization has been reflected in the above pro forma disclosure.

The pro forma financial information also includes the amortization and depreciation expense from the acquired assets, adjustments to interest expense related to the relative changes in long-term debt at both MGC Diagnostics and Medisoft, adjustments related to foreign income taxes, as well as the impact of the changes in the foreign currency rates during the periods and resulting foreign currency income (loss) from the Euro-denominated intercompany loan agreements that funded the acquisition.