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Goodwill

12 Months Ended

Dec. 31, 2011

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill

The Company’s goodwill recorded relates to the Communications Management and Cybersecurity Solutions segments.

The Company evaluates goodwill for impairment annually as of December 31^st and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The goodwill impairment test utilizes a two-step approach. The first step identifies whether there is potential impairment by comparing the fair value of a reporting unit to the carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, the second step of the impairment test is required to measure the amount of any impairment loss. As of December 31, 2011 and 2010, goodwill was not impaired and there were no accumulated impairment losses.

Goodwill impairment testing involves management judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value using widely accepted valuation techniques. The Company uses a combination of the income approach (discounted cash flow method) and market approach (market multiples). When preparing discounted cash flow models under the income approach, the Company uses internal forecasts to estimate future cash flows expected to be generated by the reporting units. Actual results may differ from forecasted results. The Company uses the expected cost of equity financing, estimated using a capital asset pricing model, to discount future cash flows for each reporting unit. The Company believes the discount rates used appropriately reflect the risks and uncertainties in the financial markets generally and specifically in the Company’s internally developed forecasts. Further, to assess the reasonableness of the valuations derived from the discounted cash flow models, the Company also analyzes market-based multiples for similar industries of the reporting unit, where available.

The changes in the carrying amount of goodwill were as follows for the years ended December 31:

	2011			2010

Beginning balances, January 1	$	11,329,917		$	9,770,647
Additions:
Additional earnout purchase consideration in connection with iSYS Membership Intrest Purchase Agreement dated dated January 4, 2008 (1)		500,212			1,043,032
Acquisition of Vuance business through ARCC (See Note 8)		-			516,238
Acquisition of Avalon Global Solutions, Inc. through WSC (See Note 8)		6,516,432			-
Reductions:
Purchase adjustment related to Vuance earn-out liability reduction (See Note 8)		(153,000	)		-
Ending balances, December 31	$	18,193,561		$	11,329,917

(1) In connection with the Membership Interest Purchase Agreement (the “Membership Agreement”) between the Company, iSYS, LLC and Jin Kang, dated January 4, 2008, the Company delivered 3,000,000 shares of Company’s common stock valued at $1.00 per common share into escrow on January 8, 2008, subject to the satisfaction of certain earnout provisions under the Membership Agreement. Under the Membership Agreement the initial $1.4 million in earnings before interest, taxes, depreciation and amortization (“EBITDA”) from iSYS is excluded from the earnout for the initial 3 years, with 66% of the value in excess of such initial $1.4 million being paid to the former owner of iSYS, with 50% of the amount being paid in cash and 50% being valued and released in escrow shares. In the fourth year the value in excess of 50% is used instead of 66%, with the total earnout capped at $6 million, with $3 million payable in cash and $3 million payable in the release of earnout shares. Performance of the earnout is measured annually and awarded within 30 days following the end of the Company’s fiscal year and filing of the Company’s Form 10-K for that year.

For the years ended December 31, 2011 and 2010, the Company issued common shares of 295,983 and 445,740, respectively, which were earned in accordance with the terms of the Membership Agreement. For the years ended December 31, 2011 and 2010, the Company accrued the cash portion payable in connection with the earnout achieved of $295,983 and $445,740, respectively. For the years ended December 31, 2011 and 2010, the Company paid $445,740 and 690,510, respectively.

Fiscal 2011 was the last measurement year for the iSYS earnout provision. Between fiscal 2008 and 2011, the Company released a total of 1,617,051 common shares from escrow which increased goodwill by $2,975,265. As of December 31, 2011, there were 1,382,949 common shares remaining in escrow that were not earned and returned to the Company in fiscal 2012.