Annual report pursuant to Section 13 and 15(d)

NOTE 7: - GOODWILL AND OTHER INTANGIBLE ASSETS, NET

v3.6.0.2
NOTE 7: - GOODWILL AND OTHER INTANGIBLE ASSETS, NET
12 Months Ended
Dec. 31, 2016
Goodwill and Intangible Assets Disclosure [Abstract]  
Goodwill and Intangible Assets Disclosure [Text Block]
NOTE 7:–                        GOODWILL AND OTHER INTANGIBLE ASSETS, NET

a.           Goodwill

The Company allocates goodwill acquired in a business combination to the appropriate reporting unit as of the acquisition date. Currently, the Company’s reporting units are also its reportable segments and the associated goodwill was determined when the specific businesses in the reportable segments were purchased.

A summary of the goodwill by business segment is as follows:

 
 
December 31,
2015
   
Additions
   
Adjustments
(currency)
   
December 31,
2016
 
Training and Simulation Division
 
$
24,435,641
   
$
   
$
   
$
24,435,641
 
Power Systems Division
   
21,027,386
     
     
26,490
     
21,053,876
 
Total
 
$
45,463,027
   
$
   
$
26,490
   
$
45,489,517
 

The Company completed its annual goodwill impairment review using the financial results as of the quarter ended December 31, 2016, using its forecasted plan developed in the fourth quarter.

With respect to its Training and Simulation Division, the Company determined, using qualitative factors, that goodwill was not impaired.

For its Power Systems Division, the Company determined that it was necessary to perform a quantitative assessment of goodwill for the purpose of determining whether an impairment existed at December 31, 2016. When conducting this analysis, the Company engaged third party valuation experts with a detailed understanding of its Power Systems Division to perform a valuation of the Power Systems Division on a going concern basis. The Company also evaluated its historic financial performance in light of its planned financial performance over the period evaluated by its third party experts. Finally, the Company prepared a discounted cash flow analysis over a five year period so as to derive a reasonable view of the cash flows that the Power Systems Division are projected to generate from 2017-2021.

Key valuation assumptions – Power Systems Division

Inherent in a valuation of a firm is the reliance on key assumptions, including, but not limited to, the cash flows of the reporting unit, weighted average cost of capital (“WACC”), and terminal growth rates of the Company. In evaluating its key variables, the Company concluded that the WACC and terminal growth rates of the Power Systems Division were approximately 13% and 3%, respectively.

As part of its annual budget process and in light of the operating losses of the reporting unit in 2016, the Power Systems Division prepared its 2017 budget and provided a prospective view of their various businesses, including key products, new and existing markets and customers, production processes, and insight into the future growth of the business. To the extent that there is a significant economic downturn, a freeze in military spending, a loss of a major contract or customer, or a significant shift of pre-existing customer arrangements to future years, the Company may need to evaluate goodwill for impairment in between the annual measurement period if events and circumstances indicate that it is more likely than not the asset is impaired.

As a result of its quantitative analysis, in which the Company computed the fair value of the Power Systems Division, the Company concluded that the fair value of the reporting unit exceeded the reporting unit’s carrying value by approximately 37%. The Company will continue to monitor the actual results of the reporting unit against its plan and re-evaluate goodwill as required in between the annual measurement period if events and circumstances indicate that it is more likely than not the asset is impaired.

The Company also considered its current market capitalization compared to the sum of the estimated fair values of its reporting units in conjunction with each impairment assessment. As of the December 31, 2016 valuation date, its market capitalization was approximately $92.5 million, which did not, in management’s view, suggest that the fair value estimates used in its impairment assessment required any adjustment.

As a result of these analyses, the Company concluded that the goodwill recorded in relation to the Power Systems Division was not impaired at December 31, 2016.

b.           Other intangible assets:

 
   
 
December 31,
 
 
 
 
2016
   
2015
 
Original Useful life
 
Cost
   
Net book value
   
Cost
   
Net book value
 
Technology
4 - 8 years
 
$
9,988,000
   
$
1,617,000
   
$
9,988,000
   
$
2,377,250
 
Capitalized software costs
1 - 3 years
   
4,974,105
     
542,220
     
4,609,946
     
630,230
 
Trademarks
  10 years
   
28,000
     
2,800
     
28,000
     
5,600
 
Backlog/customer relationship
1 - 10 years
   
2,844,000
     
8,826
     
2,844,000
     
38,650
 
Covenant not to compete
  6 years
   
400,000
     
172,000
     
400,000
     
304,000
 
Customer list
2 - 10 years
   
14,173,645
     
3,681,500
     
14,173,645
     
5,180,000
 
 
 
   
32,407,750
   
$
6,024,346
     
32,043,591
   
$
8,535,730
 
Less - accumulated amortization
 
   
(26,383,404
)
           
(23,507,861
)
       
Amortized cost
 
   
6,024,346
             
8,535,730
         
Trademarks (indefinite lives)
 
   
799,000
             
799,000
         
Net book value
 
 
$
6,823,346
           
$
9,334,730
         

Amortization expense amounted to $2,875,543, $3,043,536, and $2,696,740 for the years ended December 31, 2016, 2015 and 2014, respectively, including amortization of capitalized software costs of $88,010, $255,000, and $378,000, respectively.

c.           Estimated amortization expenses, using both straight line and accelerated amortization methods, for the years shown is as follows:

Year ending December 31,
 
2017
 
$
2,210,624
 
2018
   
1,415,221
 
2019
   
885,000
 
2020
   
574,500
 
2021
   
291,500
 
Thereafter
   
647,501
 
Total
 
$
6,024,346
 

Goodwill and other intangible assets are adjusted on a quarterly basis for any change due to currency fluctuations and any variation is included in the accumulated other comprehensive income on the consolidated balance sheets.