Intangible Assets and Goodwill

12 Months Ended

Dec. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets

Intangible assets consist of developed technology recorded as a result of the acquisition of CDI on October 14, 2015, which is included in the Nexsan reportable segment.



	2016			2015
	(In millions)
Cost	$	4.3		$	4.3
Accumulated amortization	(0.9		)	(0.1		)
Intangible assets, net	$	3.4		$	4.2

The following table presents the changes in intangible assets:



	Developed Technology & Other
	(In millions)
December 31, 2015	$	4.2
Amortization	(0.8		)
December 31, 2016	$	3.4

Amortization expense from continuing operations for intangible assets consisted of the following:



	Years Ended December 31,
	2016		2015
	(In millions)
Amortization expense	$	0.8	$	5.6

Based on the intangible assets in service as of December 31, 2016, estimated amortization expenses for each of the next five years ending December 31 is as follows:



	2017		2018		2019		2020		2021
	(In millions)
Amortization expense	$	0.7	$	0.7	$	0.7	$	0.7	$	0.6

2016 Intangible Asset Analysis

We closed a transaction in January 2017 with NXSN Acquisition Corp. (“NXSN”), an affiliate of Spear Point Capital Management LLC, pursuant to which all of the issued and outstanding common stock of Nexsan was sold to NXSN in exchange for 50% of the issued and outstanding common stock of NXSN and a $25 million senior secured convertible promissory note (the “NXSN Transaction”). Prior to the consummation of the NXSN Transaction, we contributed all of the issued and outstanding stock of CDI to Nexsan. The NXSN Transaction provides for third-party investment in the Nexsan business to enhance Nexsan’s growth and support its recent product developments, eliminated our need to make this investment in Nexsan ourselves and preserved the potential for equity value upside from Nexsan’s ongoing development and market penetration.

2015 Intangible Asset Analysis

During the third quarter of 2015, management and the Board of Directors engaged in a detailed strategic and financial assessment of the Company. As a result of this assessment, we significantly revised our previous business strategy by adjusting our product portfolio to a smaller product offering as well as changing our investment philosophy such that the investment in operating expenses will be significantly reduced. Because of our strategy change, smaller product portfolio and reduced future investment, we revised our forecasts, which we determined to be a triggering event for impairment testing. This required the assessment of the recoverability of the long-lived assets (including definite-lived intangible assets).

We compared the carrying amounts of our asset groups with their estimated undiscounted future cash flows and determined that the carrying amount of certain asset groups exceeded the undiscounted cash flows expected to be generated by such asset groups. For those asset groups, we compared the carrying amount to their estimated fair values to determine the amount by which our long-lived assets (primarily intangible assets) with the asset group were impaired. As a result of these analyses, we recorded an impairment charge of $29.7 million in the Consolidated Statements of Operations for the period ended December 2015 in continuing operations.

In determining the estimated fair value of the asset groups, we used the income approach, a valuation technique under which we estimate future cash flows using the asset group's financial forecasts. Our expected cash flows are affected by various significant assumptions, including the discount rate, revenue, gross margin and EBITA (earnings before interest, taxes and amortization) expectations and the terminal value growth rate. Our analysis utilized discounted forecasted cash flows over a 10 years period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The assumptions included utilized discount rates of approximately 16% percent and terminal growth rates ranging from zero to 3.0 percent.

Goodwill

See Note 14 - Business Segment Information for a discussion regarding our changes to reportable segments which occurred in the first quarter of 2016. The following table presents the changes in goodwill allocated to our reportable segments:



	Nexsan
	(in millions)
Balance as of December 31, 2014:	28.1

Goodwill from acquisition of Connected Data, Inc.	3.8
Goodwill impairment - Nexsan	(28.1		)
Balance as of December 31, 2015:	3.8

Goodwill	67.3
Accumulated impairment losses	(63.5		)
Balance as of December 31, 2016:	$	3.8

2016 Goodwill Analysis

We test the carrying amount of a reporting unit's goodwill for impairment on an annual basis during the fourth quarter of each year or if an event occurs or circumstances change that would warrant impairment testing during an interim period. Goodwill acquired in the acquisition of CDI was fully allocated to the Nexsan reporting unit and was fully integrated into the Nexsan business, both operationally and with respect to its management team in 2016.

As of December 31, 2016, the remaining balance of goodwill of $3.8 million originated from the acquisition of CDI in 2015 and was assigned to the Nexsan reporting segment.

2015 Goodwill Analysis

During the third quarter of 2015, management and the Board of Directors engaged in an assessment of the Nexsan business of the Company. As a result of this assessment, we significantly revised our previous business strategy by narrowing our product portfolio and changing our investment philosophy associated with these businesses by substantially reducing investment in operating expenses. Because of our strategy change, smaller product portfolio and reduced future investment, we revised our forecasts, which we determined to be a triggering event requiring us to review our goodwill related to our Nexsan reporting unit for impairment.

In determining the estimated fair value of these reporting units, we used the income approach, a valuation technique under which we estimate future cash flows using the reporting unit's financial forecasts. Our expected cash flows are affected by various significant assumptions, including the discount rate, revenue, gross margin and EBITA (earnings before interest, taxes and amortization) expectations and the terminal value growth rate. Our analysis utilized discounted forecasted cash flows over a 10 year period with an estimation of residual growth rates thereafter. We use our business plans and projections as the basis for expected future cash flows. The assumptions included utilized discount rates of approximately 16.0 percent and terminal growth rates ranging from zero to 3.0 percent.

As a result of this assessment, it was determined that the carrying values of our Nexsan reporting unit exceeded their estimated fair values. Accordingly, we performed a Step 2 goodwill impairment test which compared the implied value of the goodwill associated with each of these reporting units to the carrying value of the goodwill associated with each of these reporting units. Based on this analysis, the carrying values of the goodwill associated with Nexsan exceeded its implied value by $28.1 million. Consequently, we recorded an impairment charge of $28.1 million in the Consolidated Statements of Operations for the year ended December 31, 2015.

See Note 2 - Summary of Significant Accounting Policies in our Notes to Consolidated Financial Statements as well as Critical Accounting Policies and Estimates for further background and information on goodwill impairments.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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