Annual report pursuant to Section 13 and 15(d)

3. INTANGIBLE ASSETS AND GOODWILL

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3. INTANGIBLE ASSETS AND GOODWILL
12 Months Ended
Dec. 31, 2012
Intangible Assets And Goodwill  
NOTE C - INTANGIBLE ASSETS AND GOODWILL

Total identifiable intangible assets acquired and their carrying values at December 31, 2012 are:

 

    Cost     Accumulated
Amortization
    Accumulated Impairment     Carrying Value     Weighted Average
Amortization Period
(Years)
 
Amortized Identifiable Intangible Assets:                                        
Subscriber lists – EthoStream   $ 2,900,000     $ (1,399,703 )   $     $ 1,500,297       12.0  
Total Amortized Identifiable Intangible Assets     2,900,000       (1,399,703 )           1,500,297          
Goodwill – EthoStream     8,796,430             (3,000,000 )     5,796,430          
Goodwill – SSI     5,874,016             (3,100,000 )     2,774,016          
Total Goodwill     14,670,446               (6,100,000 )     8,570,446          
Total   $ 17,570,446     $ (1,399,703 )   $ (6,100,000 )   $ 10,070,743          

  

Total identifiable intangible assets acquired and their carrying values at December 31, 2011 are:

 

    Cost     Accumulated
Amortization
    Accumulated Impairment     Carrying Value     Weighted Average
Amortization Period
(Years)
 
Amortized Identifiable Intangible Assets:                              
Subscriber lists – EthoStream   $ 2,900,000     $ (1,158,023 )   $     $ 1,741,977       12.0  
Total Amortized Identifiable Intangible Assets     2,900,000       (1,158,023 )           1,741,977          
Goodwill – EthoStream     8,796,430             (3,000,000 )     5,796,430          
Goodwill – SSI     5,874,016             (3,100,000 )     2,774,016          
Total Goodwill     14,670,446               (6,100,000 )     8,570,446          
Total   $ 17,570,446     $ (1,158,023 )   $ (6,100,000 )   $ 10,312,423          

 

Total amortization expense charged to operations for the years ended December 31, 2012 and 2011 was $241,680 per year. 

 

Estimated future amortization expense as of December 31, 2012 is as follows:

  

Years Ended December 31,      
2013   $ 241,680  
2014     241,680  
2015     241,680  
2016     241,680  
2017     241,680  
2018 and after     291,897  
Total   $ 1,500,297  

 

The Company does not amortize goodwill. The Company recorded goodwill in the amount of $15,570,446 as a result of the acquisitions of EthoStream and SSI during the year ended December 31, 2007.   The Company evaluates goodwill for impairment based on the fair value of the operating business units to which this goodwill relates at least once a year. We utilize a discounted cash flow valuation methodology to determine the fair value of the reporting unit. At December 31, 2011, the Company determined that a portion of the value Smart Systems International’s goodwill was impaired based upon management’s assessment of operating results and forecasted discounted cash flow and has written off $3,100,000 in connection with the impairment.  Since acquisition, the Company has written off $3,000,000 and $3,100,000 of goodwill for Ethostream and Smart Systems International, respectively.

 

Significant assumptions used in our goodwill impairment test at December 31, 2012 and 11 included:  expected revenue growth rates, operating unit profit margins, working capital levels, discount rates of 12.9% and 17.5% for Ethostream and SSI, respectively and a terminal value multiple. The expected future revenue growth rates and the expected operating unit profit margins were determined after considering our historical revenue growth rates and operating unit profit margins, our assessment of future market potential, and our expectations of future business performance. The test resulted in no impairment for the year ended December 31, 2012.

 

The estimated fair value of our goodwill could change if the Company is unable to achieve operating results at the levels that have been forecasted, or if there is a permanent, negative change in the market demand for the services offered by the Company. These changes could result in an impairment of the existing goodwill balance that could require an additional material non-cash charge to our results of operations.