9.	Goodwill and Intangible Assets

Goodwill

The following table presents goodwill and changes in the carrying amount of goodwill for each of the Company’s business segments as of June 30, 2012, and December 31, 2011 (in thousands):


	Total			Identity Management			ID Products
Balance at December 31, 2010	$	47,126		$	37,955		$	9,171
Goodwill acquired during the period		10,518			10,518			—
Goodwill measurement period adjustment		118			—			118
Currency translation adjustment		642			365			277

Balance at December 31, 2011		58,404			48,838			9,566
Goodwill acquired during the period		12,958			12,958			—
Goodwill impaired during the period		(21,450	)		(15,613	)		(5,837	)
Currency translation adjustment		(962	)		(943	)		(19	)

Balance at June 30, 2012	$	48,950		$	45,240		$	3,710

During the six months ended June 30, 2012, the Company recorded goodwill of $13.0 million in connection with its acquisition of payment solution. During the year ended December 31, 2011, the Company recorded goodwill of $10.5 million in connection with its acquisition of idOnDemand and polyright. Of the total goodwill, a certain amount of goodwill is designated in a currency other than United States Dollars and is adjusted at each reporting period for the change in foreign exchange rates between the balance sheet dates. In accordance with its accounting policy and ASC 350, the Company tests its goodwill and any other intangibles with indefinite lives annually for impairment and assesses whether there are any indicators of impairment on an interim basis. The Company had performed its annual impairment test for all reporting units on December 1, 2011 in accordance with its accounting policy and concluded that there was no impairment to goodwill during the year ended December 31, 2011.

Beginning in May 2012, the Company experienced a significant decline in its stock price, resulting in the Company’s market capitalization falling significantly below its net book value. In addition, during the second quarter of 2012, the Company’s demand outlook deteriorated due to macroeconomic uncertainty and associated softness in the demand for the Company’s offerings. As a result, the Company reduced its forecasted revenue, gross margin and operating profit for future periods. These factors are considered indicators of potential impairment under the Company’s critical accounting policy, and as a result, the Company performed an interim goodwill impairment analysis as part of its quarterly close as of June 30, 2012. The interim impairment of goodwill was primarily triggered due to decline in the Company’s market capitalization that occurred after the filing of 2012 first fiscal quarter Form 10-Q and, to a lesser extent, a decrease in the forecasted future cash flows used in the income approach. Prior to its goodwill impairment test, the Company first tested its long-lived assets, including property and equipment and intangible assets for impairment and adjusted the carrying value of each asset group to its fair value and recorded the associated impairment charge in its condensed consolidated financial statements. ASC 350 requires a two-step method for determining goodwill impairment. The first step of the impairment test compared the fair value of each reporting unit to its carrying value, including the goodwill related to the respective reporting units. At the time the impairment test was performed, the Company determined that it had six reporting units consisting of Hirsch, Multicard, payment solution and idOnDemand, which are the four components of the Identity Management segment, and ID Infrastructure and Transponders, which are the two components of the ID Products segment. The Company calculated the fair value of the reporting units using a combination of the market and income approaches and in doing so relied in part upon an independent third-party valuation report. The market approach estimates the fair value of a business based on a comparison of the Company to comparable firms in similar lines of business that are publicly traded or which are part of a public or private transaction. The income approach requires estimates of expected revenue, gross margin and operating expenses in order to discount the sum of future cash flows using each particular reporting unit’s weighted average cost of capital. The Company’s growth estimates were based on historical data and internal estimates developed as part of its long-term planning process. The Company tested the reasonableness of the inputs and outcomes of its discounted cash flow analysis by comparing these items to available market data. Based on the preliminary results of step one of the goodwill impairment analysis, it was determined that the Company’s net adjusted carrying value exceeded its estimated fair value for the idOnDemand, Transponder and Multicard reporting units. As a result, the Company proceeded to the second step of the impairment test for these three reporting units to determine the implied fair value of goodwill and compare it to the carrying amount of that goodwill to determine impairment loss.

During the second step of the goodwill impairment review, management estimated the fair value of the Company’s tangible and intangible net assets and in doing so relied in part upon an independent third-party valuation report. Identified intangible assets were valued specifically for each reporting unit tested. The difference between the estimated fair value of each reporting unit and the sum of the fair value of the identified net assets results in the implied value of goodwill. Due to the length of time necessary to measure impairment of goodwill relating to these three reporting units, the goodwill impairment analysis was not completed as of the time of the filing of this Quarterly Report on Form 10-Q and is subject to change. Based on the preliminary results of step two of the goodwill impairment analysis, the Company concluded that the carrying value of goodwill for the idOnDemand, Transponder and Multicard reporting units was impaired and recorded a preliminary goodwill impairment charge of $21.4 million, which is included in the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2012. The Company expects to complete its analysis prior to reporting its financial results for the third quarter of 2012 and will record any adjustments to this preliminary estimate at that time. Future impairment indicators, including further declines in the Company’s market capitalization or changes in forecasted future cash flows, could require additional impairment charges. There was no goodwill impairment during the three and six months ended June 30, 2011.

Intangible Assets

The following table summarizes the gross carrying amount and accumulated amortization for the intangible assets resulting from acquisitions (in thousands):


	Order Backlog			Trade Secrets			Patents			Existing Technology			Customer Relationship			Trade Name			Total
Cost:
Amortization period		0.25 -1 year			1 -2 years			12 years			6 -15 years			4 -15 years			1 -10 years and Indefinite			Total

Balance at December 31, 2010	$	724		$	—		$	—		$	5,462		$	22,742		$	9,221		$	38,149
Acquired as a part of idOnDemand acquisition		17			300			790			2,700			390			60			4,257
Acquired as a part of polyright acquisition		246			—			—			—			1,290			—			1,536
Currency translation adjustment		(39	)		—			—			8			373			86			428

Balance at December 31, 2011	$	948		$	300		$	790		$	8,170		$	24,795		$	9,367		$	44,370
Acquired as a part of payment solution acquisition		344			—			—			2,023			1,323			542			4,232
Impairment of intangible assets		(841	)		(300	)		(790	)		(4,359	)		(10,540	)		(8,507	)		(25,337	)
Currency translation adjustment		(22	)		—			—			(88	)		(156	)		(37	)		(303	)

Balance at June 30, 2012	$	429								$	5,746		$	15,422		$	1,365		$	22,962

Accumulated Amortization
Balance at December 31, 2010		(718	)		—			—			(595	)		(2,970	)		(1	)		(4,284	)
Amortization expense		(235	)		(120	)		(44	)		(715	)		(2,946	)		(37	)		(4,097	)
Currency translation adjustment		5			—			—			15			(8	)		—			12

Balance at December 31, 2011	$	(948	)	$	(120	)	$	(44	)	$	(1,295	)	$	(5,924	)	$	(38	)	$	(8,369	)
Amortization expense		(37	)		(90	)		(33	)		(550	)		(1,661	)		(49	)		(2,420	)
Impairment of intangible assets		677			210			77			743			3,644			74			5,425
Currency translation adjustment		10			—			—			7			45			—			62

Balance at June 30, 2012	$	(298	)	$	—		$	—		$	(1,095	)	$	(3,896	)	$	(13	)	$	(5,302	)

Intangible Assets, net at June 30, 2012	$	131		$	—		$	—		$	4,651		$	11,526		$	1,352		$	17,660

Intangible Assets, net at December 31, 2011	$	—		$	180		$	746		$	6,875		$	18,871		$	9,329		$	36,001

During the six months ended June 30, 2012, the Company recorded intangible assets of $4.2 million in connection with its acquisition of payment solution as described in Note 3 above. Of the total intangible assets, certain acquired intangible assets are designated in a currency other than United States Dollars and are adjusted each reporting period for the change in foreign exchange rates between the balance sheet dates.

As noted above, beginning in May 2012, the Company experienced a significant decline in its stock price and during the 2012 second quarter experienced deterioration in its demand outlook as a result of macroeconomic uncertainty. Consequently, the Company performed an interim goodwill impairment analysis as of June 30, 2012. In conjunction with its goodwill impairment test, the Company also performed an impairment analysis for intangible assets in accordance with its accounting policy for reviewing long-lived assets for impairment. Management determined the estimated undiscounted cash flows and the fair value of the identified intangible assets to measure the impairment loss and in doing so relied in part upon an independent third-party valuation report. The impairment analysis for intangible assets indicated that some of the identified intangible assets are not recoverable as the sum of its estimated future undiscounted cash flows were below the asset’s carrying value and accordingly, the Company estimated the fair value of these identified intangible assets using a discounted cash flow analysis to measure the impairment loss. The discounted cash flow analysis requires estimates such as, expected revenue, gross margin and operating expenses, in order to discount the sum of future independent cash flows using discount rates which were determined based on an analysis of each individual identified intangible asset group and consideration of the aggregate business of the Company. The discount rates used in the present value calculations were in the range of 16% to 20%, except for one asset group where it was 50%. The discount rates were derived from a weighted average cost of capital (“WACC”) analysis, adjusted to reflect additional risks related to each asset’s characteristics. The Company tested the reasonableness of the inputs and outcomes of its discounted cash flow analysis by comparing these items to available market data. As a result of this analysis, the Company concluded that certain of its intangible assets were impaired as of June 30, 2012 and recorded an impairment charge of $19.9 million, which is included as part of operating expenses in the condensed consolidated statements of operations for the three and six months ended June 30, 2012. Based on this analysis, the Company expects to recover the remaining balance of identified intangible assets of $17.7 million.

Intangible assets of $36.0 million as of December 31, 2011 include intangible assets of $9.3 million that are not subject to amortization. As of June 30, 2012, the Company evaluated the reasonableness of useful lives of its indefinite-lived intangible assets and determined that these assets’ useful lives are no longer indefinite. As a result, the Company will begin to amortize these assets over their useful lives. The impairment charge of $19.9 million above includes $8.1 million related to intangible assets which were classified as indefinite-lived intangible assets as of December 31, 2011. Intangible assets subject to amortization are amortized over their useful lives as shown in the table above. The Company had performed its annual impairment test for intangible assets with indefinite useful lives in accordance with its accounting policy as of December 1, 2011 and concluded that there was no impairment to unamortizable intangible assets during the year ended December 31, 2011.

The following table illustrates the amortization expense included in the condensed consolidated statements of operations for the three and six months ended June 30, 2012 and 2011 (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Cost of revenue	$	366	$	225	$	703	$	346
Selling and marketing		893		724		1,717		1,390

Total	$	1,259	$	949	$	2,420	$	1,736

The estimated future amortization expense of purchased intangible assets with definite lives for the next five years is as follows (in thousands):


June 30, 2012:
2012 (remaining six months)	$	1,561
2013		2,558
2014		1,685
2015		1,668
2016		1,488
2017 and thereafter		8,700

Total	$	17,660