NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

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 during the second quarter of 2020. 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.

In accordance with authoritative guidance issued by the FASB, the Company performed an annual impairment test of goodwill and indefinite-lived intangible assets as of November 30, 2020. For both 2020 and 2019, with respect to Florida Pneumatic and Hy-Tech, the Company determined their fair value using the income approach methodology of valuation, which considers the expected present value of future cash flows. As an integral part of the valuation process, the Company utilizes its latest cash flows forecasts for the next four fiscal years, and then applies projected minimal growth for all remaining years, based upon available statistical data and management’s estimates.

The result of the Company’s impairment test as of November 30, 2020 for Florida Pneumatic and Hy-Tech determined that their respective fair value exceeded the carrying value and, as such, no further impairment to Goodwill and other intangible assets was recorded.

Changes in the carrying amount of goodwill are as follows:


Balance, January 1, 2020	$	4,726,000
Currency translation adjustment		7,000
Impairment of Goodwill recorded at June 30, 2020		(284,000)
Balance, December 31, 2020	$	4,449,000

Other Intangible Assets

The Company, during the second quarter of 2020, estimated the fair value of the NUMATX patent, and its 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. Further, 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. As a result of the aforementioned, the Company adjusted the fair value of the above-mentioned intangible assets by recording a non-cash impairment charge of $1,328,000 in the second quarter of 2020.

The result of the Company’s impairment test as of November 30, 2020, for Florida Pneumatic and Hy-Tech determined that their respective fair value exceeded the carrying value and, as such, no impairment to other intangible assets was recorded.

In the future, should events or circumstances change, or the Company’s financial condition further materially decline, where it 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.


	December 31, 2020						December 31, 2019
			Accumulated		Net book				Accumulated		Net book
	Cost		amortization		value		Cost		amortization		value
Other intangible assets:
Customer relationships (1)	$	6,502,000	$	3,034,000	$	3,468,000	$	7,825,000	$	2,724,000	$	5,101,000
Trademarks and trade names (1)		2,187,000		—		2,187,000		2,375,000		—		2,375,000
Trademarks and trade names		200,000		59,000		141,000		200,000		45,000		155,000
Engineering drawings		330,000		239,000		91,000		330,000		225,000		105,000
Non-compete agreements (1)		335,000		266,000		69,000		331,000		235,000		96,000
Patents		1,286,000		1,016,000		270,000		1,405,000		978,000		427,000
Totals	$	10,840,000	$	4,614,000	$	6,226,000	$	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.


			Accumulated
	Cost		amortization		Net book value
Balance, January 1, 2020	$	12,466,000	$	4,207,000	$	8,259,000
Amortization		—		702,000		(702,000)
Impairment		(1,633,000)		(305,000)		(1,328,000)
Currency translation adjustment		7,000		10,000		(3,000)
Balance, December 31, 2020	$	10,840,000	$	4,614,000	$	6,226,000

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


	December 31, 2020	December 31, 2019
Customer relationships	7.6	8.7
Trademarks and trade names	10.5	11.5
Engineering drawings	6.1	7.1
Non-compete agreements	3.0	3.7
Patents	5.2	7.1

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

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


2021	$	631,000
2022		630,000
2023		626,000
2024		577,000
2025		548,000
Thereafter		1,027,000
	$	4,039,000

Years ended December 31,