7. 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, 2013, and December 31, 2012 (in thousands):

	Total			Identity Management			ID Products
Balance at December 31, 2011	$	59,044		$	49,478		$	9,566
Goodwill acquired during the period		12,958			12,958			—
Goodwill impairment during the period		(27,084	)		(18,712	)		(8,372	)
Goodwill measurement period adjustment		297			297			—
Currency translation adjustment		55			16			39
Balance at December 31, 2012		45,270			44,037			1,233
Currency translation adjustment		(320	)		(304	)		(16	)
Balance at June 30, 2013	$	44,950		$	43,733		$	1,217

The gross amount of goodwill was $72.4 million and accumulated goodwill impairment was $27.1 million as of December 31, 2012. During the year ended December 31, 2012, the Company recorded goodwill of $13.0 million in connection with its acquisition of payment solution. In addition, the Company also adjusted goodwill by $0.3 million in connection with its acquisitions of payment solution as a measurement period adjustment during the year ended December 31, 2012. Of the total goodwill, a certain amount of goodwill is designated in a currency other than U.S. 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. Based on the interim assessment performed during the period ended June 30, 2012, significant impairment was identified, as described below. Based on interim assessments performed year to date in 2013, no impairment indicators were identified during the six months ended June 30, 2013.

The Company performed its annual impairment test for all reporting units on December 1, 2012 and concluded that there was no impairment to goodwill during the year ended December 31, 2012, other than the impairment identified in its interim assessments. During the second quarter of 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, and the Company’s demand outlook deteriorated due to macroeconomic uncertainty and associated softness in demand for the Company’s offerings. These factors were considered indicators of potential impairment, 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 its 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 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 statements of operations. The Company then performed its analysis of goodwill impairment using a two-step method as required by ASC 350. 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 calculated the fair value of each of its six reporting units using a combination of the market and income approaches. These reporting units included Hirsch, ID Solutions (formerly known as 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 market approach of fair value calculation 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 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 ID Solutions 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. 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. Based on the results of step two of the goodwill impairment analysis, the Company concluded that the carrying value of goodwill for the idOnDemand, Transponder and ID Solutions reporting units was impaired and recorded an impairment charge of $27.1 million in its consolidated statements of operations during the year ended December 31, 2012, of which $21.4 million was recorded during the three months ended June 30, 2012, $5.0 million was recorded during the three months ended September 30, 2012 and $0.7 million was recorded during the three months ended December 31, 2012. Future impairment indicators, including further declines in the Company’s market capitalization or changes in forecasted future cash flows, could require additional impairment charges.

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
Cost:
Amortization period		0.25 - 1 year			1 - 2 years			12 years			6 - 15 years			4 - 15 years			1 - 10 years
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		(1,018	)		(300	)		(790	)		(5,489	)		(15,210	)		(9,294	)		(32,101	)
Currency translation adjustment		3			—			—			(104	)		(176	)		(45	)		(322	)
Balance at December 31, 2012	$	277		$	—		$	—		$	4,600		$	10,732		$	570		$	16,179
Currency translation adjustment		(3	)		—			—			—			(3	)		—			(6	)
Balance at June 30, 2013	$	274		$	—		$	—		$	4,600		$	10,729		$	570		$	16,173
Accumulated Amortization:
Balance at December 31, 2011	$	(948	)	$	(120	)	$	(44	)	$	(1,295	)	$	(5,924	)	$	(38	)	$	(8,369	)
Amortization expense		(72	)		(90	)		(33	)		(695	)		(2,055	)		(332	)		(3,277	)
Impairment of intangible assets		959			210			77			865			5,118			87			7,316
Currency translation adjustment		(10	)		—			—			—			45			(2	)		33
Balance at December 31, 2012	$	(71	)	$	—		$	—		$	(1,125	)	$	(2,816	)	$	(285	)	$	(4,297	)
Amortization expense		(40	)		—			—			(153	)		(392	)		(285	)		(870	)
Currency translation adjustment		—1			—			—			—			2			—			3
Balance at June 30, 2013	$	(110	)	$	—		$	—		$	(1,278	)	$	(3,206	)	$	(570	)	$	(5,164	)
Intangible Assets, net at June 30, 2013	$	164		$	—		$	—		$	3,322		$	7,523		$	—		$	11,009
Intangible Assets, net at December 31, 2012	$	206		$	—		$	—		$	3,475		$	7,916		$	285		$	11,882

Of the total intangible assets, certain acquired intangible assets are designated in a currency other than U.S. Dollars and are adjusted each reporting period for the change in foreign exchange rates between the balance sheet dates. Intangible assets subject to amortization are amortized over their useful lives as shown in the table above. The Company evaluated its amortizable intangible assets for impairment as of June 30, 2013 and December 31, 2012 and concluded that no indicators of impairment existed as of the respective dates. The Company expects to recover the remaining balance of identified intangible assets of $11 million at June 30, 2013.

As noted above, the Company performed an interim goodwill impairment analysis as of June 30, 2012 and in conjunction also performed an impairment analysis for intangible assets. Management determined the estimated undiscounted cash flows and the fair value of the identified intangible assets to measure the impairment loss. 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. 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 and recorded an impairment charge of $24.8 million in its condensed consolidated statements of operations during the year ended December 31, 2012, of which $23.9 million was recorded during the three months ended June 30, 2012 and $0.9 million was recorded during the three months ended September 30, 2012.

The following table illustrates the amortization expense included in the consolidated statements of operations for the three and six months ended June 30, 2013 and 2012 (in thousands):

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013		2012			2013			2012
Cost of revenue	$	97		$	366		$	193		$	703
Selling and marketing		338			893			677			1,717
Total	$	435		$	1,259		$	870		$	2,420

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

June 30, 2013:
2013 (remaining six months)	$	585
2014		1,076
2015		1,042
2016		997
2017		997
Thereafter		6,312
Total	$	11,009