Goodwill and Amortizable Intangible Assets

3 Months Ended

Mar. 31, 2013

Goodwill and Amortizable Intangible Assets

Goodwill and Amortizable Intangible Assets

6. Goodwill and Amortizable Intangible Assets

The following schedule presents the changes in the carrying amount of goodwill during the period ended March 31, 2013:

Balances as of December 31, 2012	$	4,038,000
Impairment loss	(2,590,000		)
Balances as of March 31, 2013	$	1,448,000

Wave tests goodwill for impairment annually on September 30 and during interim periods whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Wave uses a fair value approach in testing goodwill for impairment in accordance with the provisions of ASC Topic 350, Intangibles—Goodwill and Other. The goodwill impairment test involves a two-step process. In the first step, we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, we must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit’s fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit’s goodwill is less than the carrying value, the difference is recorded as an impairment loss.

During the first quarter of fiscal 2013 the Company determined that sufficient indicators of potential impairment existed to require an interim goodwill impairment analysis for the Safend reporting unit. These indicators included, among others, significantly lower than expected revenue and billings during the first quarter of 2013, and downward revisions to management’s short-term and long-term forecast for Safend. The revised forecast reflected changes related to revenue growth rates, current market trends and other expectations impacting the anticipated short-term and long-term operating results of Safend. Due to the aforementioned indicators, the Company concluded that there were qualitative factors for the Safend unit that indicated it is more likely than not that the fair value of the Safend reporting unit was less than its carrying amount.

The Company estimates the fair value of its reporting units using the income approach. Under the income approach, the Company calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on management’s estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the business’s ability to execute on the projected cash flows. The inputs used for the income approach are significant unobservable inputs, or Level 3 inputs, as described in ASC Topic 820, Fair Value Measurement.

When indicators of impairment are present, such as those noted above, the Company tests long-lived assets (other than goodwill) for recoverability by comparing the carrying value of an asset group to its undiscounted cash flows. Based on the results of the recoverability test, the Company determined that the carrying value of the Safend asset group exceeded its undiscounted cash flows and was therefore not recoverable. The Company estimated the fair value of the intangible assets under an income approach as described above. Based on the analysis, the Company recorded an impairment charge of $1,615,000 on the developed technology intangible asset. The decline in the fair value of the Safend intangible assets is attributable to the same factors as discussed above for the fair value of the Safend reporting unit.

After adjusting the carrying value of the reporting unit for the impairment of the intangibles noted above, the Company completed the two step goodwill impairment test for the Safend reporting unit. The step two goodwill impairment test resulted in an implied fair value of goodwill substantially below the carrying value of the goodwill. As a result, the Company recorded a goodwill impairment charge of approximately $2.6 million, which resulted in a $1.4 million remaining carrying value of Safend goodwill as of March 31, 2013. The goodwill impairment charge of approximately $2.6 million was included in the impairment of goodwill line item in the consolidated statements of operations. The developed technology impairment charge of $1,615,000 is included in the licensing and maintenance-cost of net revenues line item in the consolidated statements of operations.

The following schedule presents the details of intangible assets as of March 31, 2013 and December 31, 2012:

March 31, 2013

Intangible Asset	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment Loss			Net		Weighted Average Remaining Useful Life (in years)
Developed Technology	$	6,426,000	$	(1,247,683	)	$	(5,038,100	)	$	140,217	5.5
In-Process Technology	90,000		—			(90,000		)	—		—
Customer Relationships	3,972,000		(553,327		)	(1,786,673		)	1,632,000		8.5
Trade Name	90,000		(90,000		)	—			—		—
Acquired Patents	1,100,000		(641,667		)	—			458,333		2.1

	$	11,678,000	$	(2,532,677	)	$	(6,914,773	)	$	2,230,550

December 31, 2012

Intangible Asset	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment Loss			Net		Weighted Average Remaining Useful Life (in years)
Developed Technology	$	6,426,000	$	(1,167,900	)	$	(3,423,100	)	$	1,835,000	5.8
In-Process Technology	90,000		—			(90,000		)	—		—
Customer Relationships	3,972,000		(505,327		)	(1,786,673		)	1,680,000		8.8
Trade Name	90,000		(90,000		)	—			—		—
Acquired Patents	1,100,000		(586,667		)	—			513,333		2.4

	$	11,678,000	$	(2,349,894	)	$	(5,299,773	)	$	4,028,333

The acquired patents were purchased for $1,100,000 on May 7, 2010 from a company owned by Robert Thibadeau, Ph. D., a noted computer security expert who joined Wave in February 2010 as Senior Vice President and Chief Scientist. The patents were issued in 2006 and 2008 and are valid until 2021. Both patents concern the methods and systems for promoting security in a computer employing attached storage devices. The patents are being amortized on a straight-line basis over 5 years based upon their estimated useful life.

Amortization expense associated with intangible assets was $182,783 and $402,799 for the three months ended March 31, 2013 and 2012, respectively. The estimated amortization expense for intangible assets for the next five years and thereafter is as follows (in thousands):

Period	Estimated Amortization Expense
Remainder of 2013	$	328
2014	437
2015	291
2016	217
2017	217
Thereafter	741
Total	$	2,231

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

+ References+ Details