Intangible Assets

Goodwill, Trademarks and Trade Names

Goodwill, trademarks and trade names represent intangible assets obtained from EOI, Endologix, Sonomed and Drew acquisitions. Goodwill represents the excess of purchase price over the fair value of net assets acquired.

The Company adopted FASB authoritative guidance effective July 1, 2001 for goodwill and identified intangible assets that have indefinite lives. These assets are no longer amortized but reviewed for impairment annually or more frequently if certain indicators arise.

In accordance with authoritative guidance effective July 1, 2001, the Company discontinued the amortization of goodwill and identifiable intangible assets that have indefinite lives. Intangible assets that have finite lives continue to be amortized over their estimated useful lives. Management has evaluated the carrying value of goodwill and its identifiable intangible assets that have indefinite lives during each of the fiscal years subsequent to July 1, 2001, utilizing discounted cash flows of the respective business units. In accordance with FASB Accounting Standards Codification ("ASC") 350-20, these intangible assets will continue to be assessed on an annual basis, and impairment, if any, would be recorded as a charge against income from operations. After evaluating the discounted cash flow of each of its respective business units, management concluded that the carrying value of goodwill and identifiable intangible assets at EMI exceeded their fair values during the year ended June 30, 2011 and therefore were impaired.

The authoritative guidance makes use of the concept of reporting units. All acquisitions must be assigned to a reporting segment or unit. Reporting units have been defined under the standards to be the same as or one level below an operating segment, as defined by FASB issued authoritative guidance related to disclosures about segments of an enterprise and related information.

The Company tests goodwill for possible impairment on an annual basis and at any other time events occur or circumstances indicate that the carrying amount of goodwill may be impaired. There was $905,810 impairment of goodwill for EMI during the year ended June 30, 2011. As a result of the Company's testing during the year ended June 30, 2012, no additional impairments were recorded.

Goodwill Impairment-EMI

At March 31, 2011 management became concerned about EMI’s performance year to date as compared to our projected budget. The projected budget included sales related to EMI’s new image management system, Axis, as well as traditional legacy digital imaging systems. A significant portion of the Axis product target market represents institutions requiring large-scale, multi-instrument solutions, which has resulted in a much longer sales cycle than we had originally envisioned. While the feedback from initial and potential customers of the Axis product has been positive, converting this interest into sales has not materialized to date at the levels we had originally projected.

EMI also encountered unexpected lagging demand for its legacy digital imaging systems primarily due to institutions allocating a disproportionate level of their capital budgets toward purchasing Optical Coherence Tomography (“OCT”) devices. It was anticipated that the emerging OCT technology would erode legacy digital imaging product sales due to competition for budgetary resources; however, the level has been greater than originally expected and not reflected in our original projections. OCT and digital imaging technologies are complementary and it is not known whether or for how long the lower available capital budgets for digital imaging will continue. These events will negatively affect the evaluation of the future operating results and cash flows of EMI.

The Company typically tests goodwill for possible impairment on an annual basis at June 30, and at any other time events occur or circumstances indicate that the carrying amount of goodwill may be impaired. Management determined that the events discussed above warranted performing an interim test of goodwill for possible impairment during the quarter ended March 31, 2011.

The first step of the FASB ASC 350 impairment analysis consists of a comparison of the fair value of the reporting segment with its carrying amount, including the goodwill. The fair value was determined based on the income approach, which estimates the fair value based on the future discounted cash flows. Under the income approach, the Company assumed, with respect to EMI, a forecasted cash flow period of 5 years , long-term annual growth rates of 3% and a discount rate of 19%.

Based on the interim income approach analysis that was performed for EMI it was determined that the carrying amount of the goodwill was in excess of its respective fair value. As such, the Company was required to perform the second step analysis in order to determine the amount of the goodwill impairment. The second step analysis consisted of comparing the implied fair value of the goodwill with the carrying amount of the goodwill, with an impairment charge resulting from any excess of the carrying value of the goodwill over the implied fair value of the goodwill. Based on the second step analysis, the Company concluded that all $905,810 of the goodwill recorded at EMI was impaired. As a result, the Company recorded a non-cash goodwill impairment charge to continuing operations totaling $905,810 during the year ended June 30, 2011 representing all of EMI's recorded goodwill.

The determination as to whether a write-down of goodwill is necessary involves significant judgment based on short-term and long-term projections of the Company. The assumptions supporting the estimated future cash flows of the reporting segment, including profit margins, long-term forecasts, discount rates and terminal growth rates, reflect the Company’s best estimates.

The following tables present unamortized intangible assets by business segment as of June 30, 2012 and 2011:



	2012 Net Carrying Amount		2011 Net Carrying Amount
Goodwill
ECD	$	93,181	$	93,181
Sonomed-Escalon	125,027		125,027
Total	$	218,208	$	218,208



	2012 Net Carrying Amount		2011 Net Carrying Amount
Trademarks and tradenames
ECD	$	89,000	$	89,000
Sonomed-Escalon	605,006		605,006
Total	$	694,006	$	694,006

Patents

It is the Company’s practice to seek patent protection on processes and products in various countries. Patent application costs are capitalized and amortized over their estimated useful lives, not exceeding 17 years, on a straight-line basis from the date the related patents are issued. Costs associated with patents no longer being pursued are expensed. Accumulated patent amortization on patents from continuing operations was approximately $229,000 and $198,000 at June 30, 2012 and 2011, respectively. Amortization expense from continuing operations for the years ended June 30, 2012 and 2011 was approximately $31,000 and $33,000, respectively.

Amortization expense, relating entirely to patents, is estimated to be approximately $14,000 in 2013 and there will be amortization expense of $2,000 related to patents in each year 2014, 2015, 2016 and 2017.

Covenant Not to Compete and Customer Lists

The Company recorded the value of covenants not to compete and customer lists as intangible assets as part of the acquisitions of MRP and JAS. The valuation was based on the fair market value of these assets at the time of acquisition. These assets are amortized over their estimated useful lives, between 5 and 10 years, on a straight-line basis from the date of acquisition. Accumulated amortization was approximately $930,000 and $653,000 at June 30, 2012 and 2011, respectively. Amortization expense for each of the years ended June 30, 2012 and 2011 was approximately $278,000 and $241,000, respectively.

Amortization expense, relating entirely to covenant not to compete and the customer list is estimated to be approximately $278,000 and $253,000 in year 2013 and 2014 and there will be no amortization expense in year 2015, 2016 and 2017.

The following table presents amortized intangible assets by business segment as of June 30, 2012:



	Gross Carrying Amount		Impairment		Adjusted Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Amortized Intangible Assets Patents
Sonomed-Escalon	$	251,361	$	—	$	251,361	$	(229,141	)	$	22,220
Total	$	251,361	$	—	$	251,361	$	(229,141	)	$	22,220
Covenant Not To Compete/ Customer Lists
ECD	$	1,461,397	$	—	$	1,461,397	$	(930,423	)	$	530,974
Total	$	1,461,397	$	—	$	1,461,397	$	(930,423	)	$	530,974

During the year ended June 30, 2011, the Company wrote off the fully amortized covenant not to compete and customer lists in the amount of approximately $443,000.

The following table presents amortized intangible assets by business segment as of June 30, 2011:



	Gross Carrying Amount		Impairment		Adjusted Gross Carrying Amount		Accumulated Amortization			Net Carrying Value
Amortized Intangible Assets Patents
Sonomed-Escalon	$	251,361	—		$	251,361	$	(198,430	)	$	52,931
Total	$	251,361	$	—	$	251,361	$	(198,430	)	$	52,931
Covenant Not To Compete/ Customer Lists
ECD	$	1,461,397	$	—	$	1,461,397	$	(652,757	)	$	808,640
Total	$	1,461,397	$	—	$	1,461,397	$	(652,757	)	$	808,640