7. Goodwill and Intangible Assets

Goodwill

The following table presents goodwill by operating segment as of June 30, 2014 and December 31, 2013 and changes in the carrying amount of goodwill (in thousands):

	Premises			Credentials			Identity			All Other			Total
Balance at December 31, 2012	$	21,891		$	522		$	1,172		$	1,079		$	24,664
Goodwill impairment during the period		(14,108	)		(522	)		—			(942	)		(15,572	)
Currency translation adjustment		—			—			36			(137	)		(101	)
Balance at December 31, 2013		7,783			—			1,208			—			8,991
Currency translation adjustment		—			—			(11	)		—			(11	)
Balance at June 30, 2014	$	7,783		$	—		$	1,197		$	—		$	8,980

In connection with the Company's 2014 organizational realignment, certain prior period amounts were reclassified to conform to the current period's operating segment presentation. Both as of June 30, 2014 and December 31, 2013, the gross amount of goodwill, excluding goodwill related to discontinued operations, was $41.8 million and accumulated goodwill impairment was $32.8 million. During the six months ended June 30, 2014, the Company derecognized goodwill of $1.3 million related to a business divested in February 2014 which was classified as held for sale as of December 31, 2013 as stated in Note 2, Discontinued Operations. This amount of goodwill was included in the current assets of discontinued operations in the condensed consolidated balance sheet as of December 31, 2013. During the year ended December 31, 2013, the Company derecognized goodwill of $8.0 million related to businesses divested in December 2013 as stated in Note 2, Discontinued Operations. This amount of goodwill was not classified as held for sale in the previous reported financial statements. Of the total goodwill, a certain amount is designated in a currency other than U. S. dollars and is adjusted 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 goodwill and intangibles with indefinite lives annually for impairment and assesses whether there are any indicators of impairment on an interim basis. The Company performs interim goodwill impairment reviews between its annual reviews if certain events and circumstances have occurred, including a deterioration in general economic conditions, an increased competitive environment, a change in management, key personnel, strategy or customers, negative or declining cash flows, or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods. The Company believes the methodology that it uses to review impairment of goodwill, which includes a significant amount of judgment and estimates, provides it with a reasonable basis to determine whether impairment has occurred. However, many of the factors employed in determining whether its goodwill is impaired are outside of its control and it is reasonably likely that assumptions and estimates will change in future periods. These changes in assumptions and estimates could result in future impairments.

Management did not identify any impairment indicators during the quarter ended June 30, 2014. The Company performed its annual impairment test for all reporting units on December 1, 2013 and concluded that there was no impairment to goodwill during the year ended December 31, 2013, other than the impairment identified in its interim assessment during the third quarter of 2013, as described below.

The Company calculates the fair value of its reporting units using a combination of market and income approaches and in doing so relies in part upon an independent third-party valuation report. Prior to its goodwill impairment test, the Company first tests its long-lived assets for impairment and adjusts the carrying value of each asset group to its fair value and records the associated impairment charge in its condensed consolidated statements of operations. The Company then performs its analysis of goodwill impairment using a two-step method as required by ASC 350. The first step of the impairment test compares the fair value of each reporting unit to its carrying value, including the goodwill related to the respective reporting units. 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 estimated future cash flows using each particular reporting unit’s weighted average cost of capital. The Company’s growth estimates are based on historical data and internal estimates developed as part of its long-term planning process. The Company tests the reasonableness of the inputs and outcomes of its discounted cash flow analysis by comparing these items to available market data. The second step of the impairment test compares the implied fair value of goodwill to the carrying value of goodwill. The implied fair value of goodwill value is determined, in the same manner as the amount of goodwill recognized in a business combination, to assess the level of goodwill impairment, if any. During the second step, management estimates the fair value of the Company’s tangible and intangible net assets. Intangible assets are identified and valued for each reporting unit for which the second step is performed. 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. If the carrying value of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized equal to that excess. In 2013, when the impairment test was performed, the Company had six reporting units. These reporting units included Hirsch, ID Solutions, payment solution and idOnDemand, which were the four components of the Identity Management segment, and ID Infrastructure and Transponders, which were the two components of the ID Products segment. In December 2013 and February 2014, two of the four reporting units in the Identity Management segment, ID Solutions and payment solution, were sold and these two reporting units no longer exist as a result. Commencing in 2014, the Company has four reporting units and four reportable segments as discussed in Note 10, Segment Reporting, Geographic Information and Major Customers. These reporting units include Hirsch which is the component of the Premises segment, ID Infrastructure, which is the component of the Identity segment, and Transponders and idOnDemand, which are the two components of the Credentials segment.

During the third quarter of fiscal 2013, the Company began a strategic review of certain under-performing business units for potential divestiture and to simplify the Company’s operations and market focus. As a consequence of the strategic review, the Company revised its forecasted revenue, gross margin and operating profit for future periods. In addition, the Company noted certain other indicators of impairment, including a change in management following the appointment of a new CEO, a sustained decline in its stock price, and continued reduced performance in certain reporting units partially as a result of the U.S. Government budget sequester. Based on its reduced forecast and the indicators of impairment noted above, the Company performed an interim goodwill impairment analysis as part of its quarterly close as of September 30, 2013. 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 Hirsch, ID Solutions, payment solution and idOnDemand reporting units. As a result, the Company proceeded to the second step of the goodwill impairment test for these four reporting units to determine the implied fair value of goodwill to calculate the impairment loss, if any.

Based on the results of step two of the goodwill impairment analysis, the Company concluded that the carrying value of goodwill for the Hirsch, ID Solutions, payment solution and idOnDemand reporting units was impaired and recorded an impairment charge of $27.3 million in its consolidated statements of operations during the year ended December 31, 2013, of which $22.6 million was recorded during the three months ended September 30, 2013 and $4.7 million was recorded during the three months ended December 31, 2013. Of the total impairment charge of $27.3 million, $15.6 million was related to continuing operations and $11.7 million was related to the divested businesses and was reflected in discontinued operations.

Intangible Assets

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

	Existing			Customer			Trade
	Technology			Relationship			Name			Total
	11.75			4 – 11.75			1
Amortization period	years			years			year			Total
Cost:
Balance at December 31, 2012	$	4,600		$	10,732		$	570		$	15,902
Currency translation adjustment		—			15			—			15
Balance at December 31, 2013	$	4,600		$	10,747		$	570		$	15,917
Balance at June 30, 2014	$	4,600		$	10,747		$	570		$	15,917
Accumulated Amortization:
Balance at December 31, 2012	$	(1,125	)	$	(2,816	)	$	(285	)	$	(4,226	)
Amortization expense		(341	)		(865	)		(285	)		(1,491	)
Currency translation adjustment		—			(16	)		—			(16	)
Balance at December 31, 2013	$	(1,466	)	$	(3,697	)	$	(570	)	$	(5,733	)
Amortization expense		(223	)		(503	)		—			(726	)
Balance at June 30, 2014	$	(1,689	)	$	(4,200	)	$	(570	)	$	(6,459	)
Intangible Assets, net at December 31, 2013	$	3,134		$	7,050		$	—		$	10,184
Intangible Assets, net at June 30, 2014	$	2,911		$	6,547		$	—		$	9,458

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 balance sheet dates. Each period, the Company evaluates the estimated remaining useful lives of purchased intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. If revisions to an intangible assets remaining period of amortization is warranted, amortization is prospectively adjusted over the remaining useful life. Intangible assets subject to amortization are amortized over their useful lives as shown in the table above. The Company evaluates its amortizable intangible assets for impairment at the end of each reporting period. The Company did not identify any impairment indicators during the quarter ended June 30, 2014. The Company identified impairment in its interim assessment during the third quarter of 2013, as mentioned below.

As noted above, the Company began a strategic review of certain under-performing business units for potential divestiture during the third quarter of fiscal 2013. As a consequence, the Company performed an impairment analysis of intangible assets in accordance with its accounting policy for reviewing long-lived assets for impairment. As a result of this analysis, the Company identified that backlog was impaired and recorded an impairment charge in its consolidated statements of operations of $0.2 million during the year ended December 31, 2013. This impairment charge was related to divested businesses and was included within the results of discontinued operations. The Company expects to recover the remaining balance of identified intangible assets of $9.5 million as of June 30, 2014.

The following table illustrates the amortization expense included in the condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013 (in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30
	2014		2013		2014		2013
Cost of revenue	$	111	$	97	$	223	$	193
Selling and marketing		252		338		503		677
Total	$	363	$	435	$	726	$	870

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


2014 (remaining six months)	$	727
2015		1,455
2016		1,455
2017		1,455
2018		1,455
Thereafter		2,911
Total	$	9,458