Note 8 - Goodwill and other intangible assets

12 Months Ended

Dec. 31, 2012

Notes to Financial Statements

Goodwill and other intangible assets :

In accordance with the Goodwill and Other Intangibles Topic of the ASC, goodwill and indefinite-lived intangible assets are tested for impairment annually, and interim impairment tests are performed whenever an event occurs or circumstances change that indicate that it is more likely than not that an impairment has occurred. December 31 has been established for the annual impairment review. Goodwill is tested for impairment at the reporting unit level. As of December 31, 2012 and 2011, all goodwill was allocated to the Government Services Sector which was considered one reporting unit.

In May 2011 the Company determined that the loss of prime status on the SPAWAR government contract coupled with the curtailment of funding of the direct labor going forward may have an impact on the carrying amount of goodwill and other intangibles. Accordingly, the Company performed an interim impairment review of its goodwill and other intangibles and determined that goodwill was impaired and recorded an impairment loss during the second quarter of $1,575,000.

The annual impairment review performed as of December 31, 2011 resulted in an additional impairment of goodwill of approximately $1,686,000 due primarily to the loss of additional contracts and continued curtailment of direct labor funding.  A discounted cash flow model was used to estimate the value of the reporting unit, which considers forecasted cash flows discounted at an estimated weighted average cost of capital.  The Company selected the discounted cash flow methodology as it believes that it is comparable to what would be used by market participants.  The forecasted cash flows are based on the Company’s long-term operating plan, and a terminal value is used to estimate the operating segment’s cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market participants of a business enterprise. These analyses require the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the timing of expected future cash flows. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting unit. Impairments of goodwill have been reported as a separate line in the Consolidated Statements of Operations.

Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions including, but not limited to, revenue growth rates, future market conditions and strategic plans. The Company cannot predict the occurrence of certain events or changes in circumstances that might adversely affect the carrying value of goodwill. Such events may include, but are not limited to, the impact of the economic environment, a material negative change in relationships with significant customers; or strategic decisions made in response to economic and competitive conditions.

A summary of the changes in the carrying amount of goodwill for the two years in the period ended December 31, 2012, is shown below:

Balance as of January 1, 2011	$	3,599,386
Addition due to Cummings Creek acquisition		402,795
Goodwill impairment charges		3,396,941
Balance as of December 31, 2011		690,871
Goodwill impairment charges		–
Balance as of December 31, 2012	$	690,871

The tables below present amortizable intangible assets as of December 31, 2012 and 2011:

	Gross Carrying		Accumulated			Impairment				Net Carrying	Weighted average remaining amortization
	Amount		Amortization			charge				Amount	period
December 31, 2012
Amortizable intangible assets:
Customer relationships	$	3,615,217	$	(2,507,782	)	$	(1,001,645	)	$	105,790		–
Knowhow and processes		2,924,790		(2,237,525	)		(687,265	)		–		–
IP Rights Agreement		1,300,000		(389,996	)		–			910,004		4.86 years
Customer backlog		1,801,055		(1,725,970	)		–			75,085		.01 years
Customer lists		279,717		(277,231	)		(2,486	)		–		–
Employment contract		165,000		(165,000	)		–			–		–
Customer contracts		113,600		(61,963	)		–			51,637		–
	$	10,199,379	$	(6,913,679	)	$	(1,691,396	)	$	1,142,518

	Gross Carrying		Accumulated			Impairment			Net Carrying		Weighted average remaining amortization
December 31, 2011	Amount		Amortization			charge			Amount		period
Amortizable intangible assets:
Customer relationships	$	3,615,217	$	(2,430,214	)	$	(1,001,645	)	$	183,360		.15 years
Knowhow and processes		2,924,790		(2,237,525	)		(687,265	)		–		–
IP Rights Agreement		1,300,000		(260,000	)		–			1,040,000		5.63 years
Customer backlog		1,801,055		(1,519,618	)		–			281,437		1.54 years
Customer lists		279,717		(277,231	)		(2,486	)		–		–
Employment contract		165,000		(165,000	)		–			–		–
Customer contracts		113,600		(24,091	)		–			89,509		2.54 years
	$	10,199,379	$	(6,913,679	)	$	(1,691,396	)	$	1,594,306

Total intangible amortization expense was $451,788 and $753,605 for the year ended December 31, 2012 and 2011, respectively.

Estimated annual intangibles amortization expense as of December 31, 2012 is as follows:

2013		320,525
2014		171,993
2015		130,000
2016		130,000
2017		130,000
Thereafter		260,000
Total	$	1,142,518