Impairment of Goodwill and Long-Lived Assets

6 Months Ended

Mar. 31, 2013

Asset Impairment Charges [Abstract]

Asset Impairment Charges [Text Block]

Note 5 – Impairment of Goodwill and Long-Lived Assets

Goodwill is subject to an annual impairment test. We consider many factors which may indicate the requirement to perform additional, interim impairment tests. These include:

· A significant adverse long term outlook for any of our industries;

· An adverse finding or rejection from a regulatory body involved in new product regulatory approvals;

· Failure of an anticipated commercialization of a product or product line;

· Unanticipated competition or the introduction of a disruptive technology;

· The testing for recoverability under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 of a significant asset group within a reporting unit;

· A loss of key personnel; and

· An expectation that a reporting unit carrying goodwill, or a significant portion of a reporting unit, will be sold or otherwise disposed of.

The Company’s Dynasil Products subsidiary (“Products”) has continued to experience delays in obtaining regulatory approval of its next generation lead paint analyzer product. Due to the uncertainties regarding whether approval of the product could be obtained in a reasonable timeframe, Products further reduced its operating expense platform in the second quarter and has limited its activities to the sale and service its current lead paint analyzer. The Company is currently evaluating various strategic alternatives associated with the lead paint analyzer product.

Products has continued to experience delays in obtaining regulatory approvals of its updated medical probe for cancer surgery. Approval is expected in the third quarter of 2013.

As a result of the downsizing of expenditures associated with both product lines and the process of evaluating strategic alternatives associated with the lead paint analyzer product, the Company determined that an interim impairment test of long lived assets and goodwill associated with this business unit was required. As required, the Company first tested long lived assets for impairment before performing the goodwill impairment test. For purposes of testing the impairment of long lived assets, management determined that Products represented an asset group as defined in ASC 360. In step one of this analysis which compares the carrying value of the Products asset group to its undiscounted expected future cash flows, the undiscounted cash flows of Products was less than its carrying value. As a result, the Company proceeded to a step two analysis, which requires valuing the asset group, determining the potential impairment and allocating that impairment to the long lived assets without writing those assets down below their respective fair values.

The fair value of the asset group was determined based on discounted cash flows. The Company’s long-lived assets (other than goodwill) consist primarily of the Acquired Customer Base intangible asset. Fair value of that asset was determined using an income approach using the multi-period excess earnings method which estimates the fair value of the asset by discounting the future projected excess earnings associated with the asset to present value as of the valuation date. Based on its analyses, the Company determined that the fair value of the long-lived assets (other than goodwill) of Products was less than the carrying amount of those assets and, as a result, recorded a non-cash, pre-tax impairment charge of approximately $2,748,000 during the quarter ended March 31, 2013.

The Company then performed a goodwill impairment test as prescribed in ASC 350. The Products reporting unit fair value was determined using a discounted cash flow analysis. This amount was lower than the carrying value which had been previously adjusted as described above. Step 2 of ASC 350 was then preformed with a “memo allocation” of the Product business unit assets. The result of this assessment indicated that the implied fair value of the goodwill was zero. As a result, the Company recognized a non-cash, pre-tax charge of approximately $4,015,000 during the quarter ended March 31, 2013.

The valuation methods utilized to value the long lived assets and the goodwill discussed above are based on the amount and timing of expected future cash flows and growth rates and include a determination of an appropriate discount rate. The cash flows utilized in the discounted cash flow analyses were based on financial forecasts developed internally by management. Estimating future cash flows requires significant judgment and projections may vary from the cash flows eventually realized. The discount rate used also requires significant judgment and is intended to reflect the risks involved in the business.