Intangible Assets and Goodwill

Intangible Assets

Intangible assets as of December 31, 2017 consist of intangible assets acquired when we closed the Capacity and Services Transaction with Clinton on February 2, 2017. The Capacity and Services Transaction allows for GBAM to place up to $1 billion of investment capacity under Clinton’s management within Clinton’s quantitative equity strategy for an initial term of five years, for which the Company issued to Clinton’s affiliate Madison Avenue Capital Holdings, Inc. 1,250,000 shares of its common stock as consideration. We recorded the 1,250,000 shares of common stock issued as an intangible asset and calculated a fair value of $10.1 million using our closing stock price on February 2, 2017. We are amortizing the $10.1 million on a straight-line basis over the five year term. See Note 16 - Related Party Transactions for additional information.

Intangible assets as of December 31, 2016 consist of developed technology recorded as a result of the acquisition of CDI. On October 14, 2015, the Company acquired 100% of the stock of CDI for a total purchase price of $6.7 million, which is included in the Nexsan reportable segment. Our allocation of the purchase price to the assets acquired and liabilities assumed resulted in the recognition of a $4.3 million intangible asset. In December 2017, we recorded an impairment charge for the net remaining intangible assets balance of $2.7 million. See the 2017 Intangible Asset Analysis below for additional info.

The following table presents the remaining intangible assets balance as of December 31 2017 and 2016:



	2017			2016
	(In millions)
Cost	$	10.1		$	4.3
Accumulated amortization	(1.9		)	(0.9		)
Intangible assets, net	$	8.2		$	3.4

The following table presents the changes in intangible assets:



	Intangible Assets
	(In millions)
December 31, 2016	$	3.4
Acquisition	10.1
Amortization	(2.6		)
Impairment charges	(2.7		)
December 31, 2017	$	8.2

Amortization expense from continuing operations for intangible assets consisted of the following:



	Years Ended December 31,
	2017		2016
	(In millions)
Amortization expense	$	2.6	$	0.8

Based on the intangible assets in service as of December 31, 2017, estimated amortization expenses for each of the next five years ending December 31 is as follows:



	2018		2019		2020		2021		2022
	(In millions)
Amortization expense	$	2.0	$	2.0	$	2.0	$	2.0	$	0.2

2017 Intangible Asset Analysis

During the fourth quarter of 2017, management engaged in a strategic and financial assessment of the Nexsan Business. As a result of this assessment, we decided to focus our resources on certain product features and stopped investing in a product technology that came from the acquisition of CDI. This resulted in a triggering event that required us to review our intangible assets for impairment.

In assessing recoverability of the intangible assets obtained from our acquisition of CDI, we compared the carrying amount of the intangible asset with its estimated fair value. To determine the estimated fair value, we used the income approach, a valuation technique under which we estimate future cash flows using financial forecasts. Our expected cash flows are affected by various significant assumptions such as discount rate, revenue and gross margin expectations. As part of this analysis, we determined the carrying amount of the intangible asset was not recoverable and its carrying amount exceeded its fair value. Consequently, we recorded an impairment charge of $2.7 million in the Consolidated Statements of Operations for the year ended December 31, 2017.

2016 Intangible Asset Analysis

We test the carrying amount of a reporting unit's intangible for impairment on an annual basis during the fourth quarter of each year or if an event occurs or circumstances change that would warrant impairment testing during an interim period. Intangible acquired in the acquisition of CDI was fully allocated to the Nexsan reporting unit and was fully integrated into the Nexsan business, both operationally and with respect to its management team in 2016.

Goodwill

As a result of the CDI acquisition, we recorded goodwill of $3.8 million as part of the purchase price allocation. The goodwill acquired was fully allocated to our Nexsan reporting unit and was primarily attributable to its workforce, strategic synergies and intangible assets that do not qualify for separate recognition. In December 2017, we recorded an impairment charge of $3.8 million. See the 2017 Goodwill Analysis below for additional info.

The following table presents the changes in goodwill:



	Nexsan
	(in millions)
Balance as of December 31, 2015:	$	3.8

Acquisition	—
Impairment charges	—
Balance as of December 31, 2016:	3.8

Acquisition	—
Impairment charges	(3.8		)
Balance as of December 31, 2017:	$	—

2017 Goodwill Analysis

In assessing recoverability of the goodwill recorded as part of the purchase price allocation from the CDI acquisition, we compared the carrying amount of the goodwill with its implied fair value. To determine the estimated fair value, we used the income approach, a valuation technique under which we estimate future cash flows using financial forecasts. Our expected cash flows are affected by various significant assumptions such as discount rate, revenue and gross margin expectations. As a result of this assessment, we determined the carrying value of the goodwill exceeded its fair value. Consequently, we recorded an impairment charge of $3.8 million in the Consolidated Statements of Operations for the year ended December 31, 2017.

See Note 2 - Summary of Significant Accounting Policies as well as Critical Accounting Policies and Estimates within the Management's Discussion and Analysis section for further background and information on goodwill impairments.

2016 Goodwill Analysis

We test the carrying amount of a reporting unit's goodwill for impairment on an annual basis during the fourth quarter of each year or if an event occurs or circumstances change that would warrant impairment testing during an interim period. Goodwill acquired in the acquisition of CDI was fully allocated to the Nexsan reporting unit and was fully integrated into the Nexsan business, both operationally and with respect to its management team in 2016.

As of December 31, 2016, the remaining balance of goodwill of $3.8 million originated from the acquisition of CDI in 2015 and was assigned to the Nexsan reporting segment.