Enom 2013 Annual Report Download - page 55

Goodwill
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. Goodwill is tested for
impairment annually during the fourth quarter of our fiscal year or when events or circumstances change that would indicate that goodwill might
be impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in
legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel,
significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or
economic trends or significant underperformance relative to expected historical or projected future results of operations.
Goodwill is tested for impairment at the reporting unit level, which is one level below or the same as an operating segment. As of
December 31, 2013, we determined that we have three reporting units. We perform an assessment whether a reporting unit's fair value is less
than our carrying value of its assets. If the fair value of the reporting unit exceeds the carrying value, goodwill is not considered to be impaired
and no additional steps are n ecessary. If, however, the fair value of a reporting unit is less than its carrying value, then a second step is
performed to determine the amount of the impairment loss. The amount of the impairment loss is the excess of the carrying amount of the
goodwill over its implied fair value. The estimate of fair value of goodwill is primarily based on an estimate of the discounted cash flows
expected to result from that reporting unit, but may require valuations of certain internally generated and unrecognized intangible assets such as
our software, technology, patents and trademarks. We performed our annual impairment analysis in the fourth quarter of the year ended
December 31, 2013, and based on the results of the annual impairment test, the fair value of each reporting unit exceeded its carrying value and
therefore no impairment of goodwill existed at December 31, 2013.
In late February 2014, we experienced a decline in our stock price that resulted in our market capitalization being lower than the book
value of our net assets for a short period of tim e prior to the issuance of the consolidated financial statements. We considered whether this
subsequent information affected the conclusions reached as part of our annual goodwill impairment test and determined that they did not. We
will continue to monitor the market price of our stock as well as our anticipated future cash flows and other indicators of the fair value of our
reporting units and will perform an interim impairment test if determined to be necessary.
Capitalization and Useful Lives Associated with our Intangible Assets, including Content and Internal Software and Website
Development Costs
We publish long-lived media content generated by our content studio which we commission and acquire from third-party freelance
creative professionals. Direct costs incurred for each individual content unit that we determine embodies a probable future economic benefit are
capitalized. The vast majority of direct content costs represent amounts paid to freelance c reative professionals to acquire content units and, to a
lesser extent, specifically identifiable internal direct labor costs incurred to enhance the value of acquired content units prior to their publication.
Internal costs not directly attributable to the enhancement of content units acquired prior to publication are expensed as incurred. All costs
incurred to deploy and publish content are expensed as incurred, including the costs incurred for the ongoing maintenance of websites on which
our content resides. We generally acquire content when our internal systems and processes, including an analysis of millions of historical
Internet search queries, advertising marketing terms, or keywords, and other data provide reasonable assurance that, given predicted consumer
and advertiser demand relative to our predetermined cost to acquire the content, the content unit will generate revenue over its useful life that
exceed the cost of acquisition. In determining whether content embodies probable future economic benefit required for asset capitalization, we
make judgments and estimates including the forecasted number of page views and the advertising rates that the content will generate. These
estimates and judgments take into consideration various inherent uncertainties including, but not limited to, total expected page views over the
articles useful life, our expected ability to renew at favorable terms or replace certain material agreements with Google that currently provide a
significant portion of our revenue; the expected ability of our direct advertising sales force to sell branded advertisements; the fact that our
content creation and distribution model is new and evolving and may be impacted by competition and technological advancements; our ability to
expand existing and enter into new distribution channels and applications for our content; and whether we will be able to continue to create
content of the same quality or generate similar economic returns from content in the future. Management has reviewed, and intends to regularly
review the operating performance of content in determining probable future economic benefits of our content.
We also capitalize initial registration and acquisition costs of our undeveloped websites and our internally developed software and website
development costs during their development phase.
In addition we have also capitalized certain identifiable intangible assets acquired in connection with business combinations and we use
valuation techniques to value these intangibles assets, with the primary technique being a discounted cash flow analysis. A discounted cash flow
analysis requires us to make various judgmental assumptions and estimates including projected revenue, operating costs, growth rates, useful
lives and discount rates .
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