NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

Changes in the carrying amount of goodwill are as follows:


Balance, January 1, 2020	$	4,726,000
Currency translation adjustment		(11,000)
Impairment of goodwill		(284,000)
Balance, June 30, 2020	$	4,431,000

Goodwill is evaluated for impairment at least annually. A more frequent evaluation is performed if events or circumstances indicate that impairment could have occurred. During the second quarter of 2020, the Company determined that a triggering event occurred as it concluded that the impact of COVID-19 on its sales, profitability and cash flows resulted in a reduction to its operating forecasts reflecting the uncertainty of the current environment. As a result, the Company performed an interim goodwill impairment test.

After completion of the interim goodwill impairment test, the Company concluded that Hy-Tech’s goodwill was fully impaired and recorded a non-cash goodwill impairment charge of $284,000 this quarter. Consistent with the procedures followed in the Company’s annual impairment test, it estimated the fair values of each of its reporting units using the income approach. The income approach uses projected future cash flows that are discounted using a weighted average cost of capital analysis that reflects current market conditions.

Other intangible assets


	June 30, 2020						December 31, 2019
			Accumulated		Net book				Accumulated		Net book
	Cost		amortization		value		Cost		amortization		value
Other intangible assets:
Customer relationships (1)	$	6,475,000	$	2,763,000	$	3,712,000	$	7,825,000	$	2,724,000	$	5,101,000
Trademarks and trade names (1)		2,169,000		—		2,169,000		2,375,000		—		2,375,000
Trademarks and trade names		200,000		52,000		148,000		200,000		45,000		155,000
Engineering drawings		330,000		232,000		98,000		330,000		225,000		105,000
Non-compete agreements (1)		324,000		242,000		82,000		331,000		235,000		96,000
Patents		1,286,000		983,000		303,000		1,405,000		978,000		427,000
Totals	$	10,784,000	$	4,272,000	$	6,512,000	$	12,466,000	$	4,207,000	$	8,259,000

(1)

A portion of these intangibles are maintained in a foreign currency and are therefore subject to foreign exchange rate fluctuations.

At June 30, 2020, based primarily on the impact of COVID-19 on the Company’s financial results, the Company determined that a triggering event occurred. As a result, the Company completed an interim impairment test, which resulted in non-cash impairment charges of $183,000 against the Universal Air Tool trade name; $88,000 against the NUMATX patent; and $1,057,000 against Hy-Tech’s customer relationships.

If events or circumstances change that would more likely than not further reduce the fair value of the remaining intangible assets, we may be required to record additional impairment charges, which could have a material effect on future results of operations and financial condition.

The Company estimated the fair value of the NUMATX patent, and its Universal Air Tool (“UAT”) trade name based on an income approach using the relief-from-royalty method. This approach is dependent upon a number of factors, including estimates of future growth and trends, royalty rates, discount rates and other variables. For the interim impairment test, its estimates of future revenue and profitability associated with NUMATX and UAT were significantly reduced, primarily reflecting the impact of COVID-19. The Company reduced the royalty rate used to estimate the fair value, reflecting the impact of the uncertain environment resulting from COVID-19. Additionally, the weighted average cost of capital used to discount the cash flows for the interim goodwill impairment test was slightly higher than the last annual test, also reflecting the increasing uncertainty resulting from COVID-19. Additionally, the Company estimated the fair value of Hy-Tech’s customer relationships based on the discounted value of future cash flows and determined that, primarily for the same reasons noted above related to impairment of the NUMATX patent and the UAT trade name, Hy-Tech’s customer relationships were fully impaired.

Amortization expense of intangible assets subject to amortization was as follows:


Three months ended June 30,				Six months ended June 30,
2020		2019		2020		2019
$	191,000	$	172,000	$	386,000	$	344,000

The weighted average amortization period for intangible assets was as follows:


	June 30, 2020	December 31, 2019
Customer relationships	8.0	8.7
Trademarks and trade names	11.0	11.5
Engineering drawings	6.6	7.1
Non-compete agreements	3.4	3.7
Patents	5.6	7.1

Amortization expense for the balance of 2020, and for each of the next five years and thereafter is estimated to be as follows:


2020	$	316,000
2021		629,000
2022		627,000
2023		624,000
2024		575,000
2025		546,000
Thereafter		1,026,000
	$	4,343,000