Goodwill and Intangible Assets | 6. GOODWILL AND INTANGIBLE ASSETS Goodwill Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired. Goodwill is tested annually for impairment at the reporting unit level during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. There were no indicators of impairment in the three and six months ended June 30, 2019. Total Balance as of January 1, 2019 $ 12,005 Goodwill acquired 10,554 Balance as of June 30, 2019 $ 22,559 Intangible Assets The following tables present details of the Company’s intangible assets as of June 30, 2019 (in thousands): June 30, 2019 Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Amount Weighted Average Remaining Useful (In Intangible assets with finite lives: Customer relationships: Allenex $ 12,650 $ (2,573 ) $ (1,489 ) $ 8,588 11.5 Customer relationships: Conexio 28 (11 ) (2 ) 15 1.5 Customer relationships: TruSight HLA 380 (160 ) — 220 1.8 Developed technology: Olerup SSP 11,650 (3,588 ) (1,246 ) 6,816 6.5 Acquired technology: QTYPE 4,510 (809 ) (519 ) 3,182 11.5 Acquired technology: Olerup SBT 127 (51 ) (6 ) 70 1.5 Acquired technology: dd-cfDNA 6,650 (889 ) — 5,761 11.6 Trademarks 2,360 (529 ) (195 ) 1,636 6.7 Customer relationships: OTTR 4,200 (47 ) — 4,153 14.8 Developed technology: OTTR 2,300 (38 ) — 2,262 9.8 Commercialization rights of Cibiltech 8,079 — — 8,079 9.9 Total intangible assets with finite lives $ 52,934 $ (8,695 ) $ (3,457 ) $ 40,782 Acquired in-process technology: AlloSeq Tx 2,719 — — 2,719 — Acquired in-process technology: AlloSeq HCT 2,103 — — 2,103 — Total intangible assets $ 57,756 $ (8,695 ) $ (3,457 ) $ 45,604 Acquisition of intangible assets Illumina License and Commercialization Agreement On May 4, 2018, the Company entered into the License Agreement with Illumina, which provides the Company with certain worldwide distribution, development and commercialization rights to Illumina’s NGS product line for use in the field of bone marrow and solid organ transplantation diagnostic testing (the “Field”). As a result, The License Agreement required the Company to make a $5.0 million initial cash payment to Illumina and further requires the Company to pay royalties in the mid-single to low-double digits on sales of future commercialized products. Pursuant to the License Agreement, the Company is obligated to complete timely development and commercialization of other NGS product lines for use in the Field, and has agreed to minimum purchase commitments of finished products and raw materials from Illumina through 2023. As the License Agreement did not meet the definition of a business combination under ASC Topic 805, Business Combinations, Costs relating to the assets acquired were $5.2 million, comprising of the cash consideration of $5.0 million and associated transaction costs of $0.2 million. A deferred tax balance was not required to be established on the License Agreement date as the book and tax basis of the intangible assets was equivalent to the amount paid. The allocation of the purchase price to identified intangible assets acquired was based on the Company’s best estimate of the fair value of such assets as of the acquisition date. Significant assumptions utilized in the valuation of identified intangible assets were based on company-specific information and projections, which are not observable in the market and are thus considered Level 3 measurements as defined by U.S. GAAP. Customer relationships represent the fair value of future projected revenue that is expected to be derived from sales of TruSight HLA products to existing customers of Illumina. The customer contracts and related relationships value has been estimated utilizing a multi-period excess earnings method under income approach, which reflects the present value of the projected cash flows that are expected to be generated by the customer relationships less charges representing the contribution of other assets to those cash flows that use projected cash flows with and without the intangible asset in place. The economic useful life was determined based on the life of the products, assuming that the existing customers will remain with the Company until the products becomes obsolete. The Company utilized a discount rate of 18% in estimating the fair value of the customer relationships. The acquired in-process technology represents the fair value of products in development that have not reached commercial production at the date of acquisition. The fair value of the products was also determined using the multi-period excess earnings method under income approach. A rate of 30% and 40% for the AlloSeq Tx acquired in-process technology and the AlloSeq HCT acquired in-process technology, respectively, was utilized to discount the cash flows to the present value. The acquired in-process technology will not be amortized until completion of the related products, which is determined to occur when the products commence commercial production. Upon completion, each acquired in-process technology product will be amortized over its estimated useful life. The following table summarizes the fair values of the intangible assets acquired as of the closing date (in thousands): Estimated Fair Value Estimated Useful Lives (Years) Customer relationships: TruSight HLA $ 380 2.6 Acquired in-process technology: AlloSeq Tx 2,719 — Acquired in-process technology: AlloSeq HCT 2,103 — Total $ 5,202 Cibiltech License and Commercialization Agreement Effective April 30, 2019, the Company entered into a license and commercialization agreement (the “Cibiltech Agreement”) with Cibiltech SAS (“Cibiltech”). Cibiltech is a French company engaged in the development and support of predictive medicine and artificial intelligence software, services and technology, with an emphasis on personalized patient care and clinical research, including its proprietary software and service offering known as Predigraft (or KidneyCare iBox in the U.S.) for the predictive analysis of post-transplantation kidney allograft loss. The Cibiltech Agreement provides the Company with an irrevocable, non-transferable right to commercialize Cibiltech’s proprietary software in the field of transplantation in the U.S. for a period of ten years. The Company estimated the fair value of the acquired commercialization rights intangible asset based on expected contractual payments discounted to present value using a discount rate of 6%. On July 26, 2019, pursuant to the Cibiltech Agreement, the Company purchased $1.0 million of convertible preferred shares of Cibiltech and does not have a significant influence on Cibiltech’s operations. The following table present details of the Company’s intangible assets as of December 31, 2018 (in thousands): December 31, 2018 Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Amount Weighted Average Remaining Useful (In Intangible assets with finite lives: Customer relationships: Allenex $ 12,650 $ (2,198 ) $ (1,129 ) $ 9,323 12.0 Customer relationships: Conexio 28 (6 ) (2 ) 20 2.0 Customer relationships: TruSight HLA 380 (86 ) — 294 2.0 Developed technology: Olerup SSP 11,650 (3,065 ) (998 ) 7,587 7.0 Acquired technology: QTYPE 4,510 (671 ) (407 ) 3,432 12.0 Acquired technology: Olerup SBT 127 (28 ) (6 ) 93 2.0 Acquired technology: dd-cfDNA 6,650 (635 ) — 6,015 11.8 Trademarks 2,260 (454 ) (140 ) 1,666 12.0 Total intangible assets with finite lives $ 38,255 $ (7,143 ) $ (2,682 ) $ 28,430 Acquired in-process technology: AlloSeq Tx 2,719 — — 2,719 — Acquired in-process technology: AlloSeq HCT 2,103 — — 2,103 — Total intangible assets $ 43,077 $ (7,143 ) $ (2,682 ) $ 33,252 Amortization expense was $0.7 million and $0.6 million for the three months ended June 30, 2019 and 2018, respectively. For the three months ended June 30, 2019, expenses of $0.4 million and $0.3 million were amortized to cost of product and sales and marketing expense, respectively. For the three months ended June 30, 2018, expenses of $0.4 million and $0.2 million were amortized to cost of product and sales and marketing expense, respectively. Amortization expense was $1.3 million and $1.2 million for the six months ended June 30, 2019 and 2018, respectively. For the six months ended June 30, 2019, expenses of $0.7 million and $0.6 million were amortized to cost of product and sales and marketing expense, respectively. For the six months ended June 30, 2018, expenses of $0.7 million and $0.5 million were amortized to cost of product and sales and marketing expense, respectively. The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of June 30, 2019 (in thousands): Years Ending December 31, Cost of Revenue Sales and Marketing Total Remainder of 2019 $ 1,392 $ 687 $ 2,079 2020 2,918 1,373 4,291 2021 2,871 1,183 4,054 2022 2,871 1,166 4,037 2023 2,871 1,166 4,037 Thereafter 13,245 9,039 22,284 Total future amortization expense $ 26,168 $ 14,614 $ 40,782 The Company evaluates the carrying value of the intangible assets, not subject to amortization, related to acquired in-process technology assets, which are considered to be indefinite‑lived until the completion or abandonment of the associated research and development efforts. Accordingly, amortization of the acquired in-process technology assets will not occur until the products reach commercialization. During the period the assets are considered indefinite‑lived, they are tested for impairment on an annual basis, as well as between annual tests if the Company becomes aware of any events occurring or changes in circumstances that would indicate that the fair values of the acquired in-process technology assets are less than their carrying amounts. An impairment loss would be recorded when the fair value of an acquired in-process technology assets is less than its carrying value. If and when development is complete, which generally occurs when the products are made commercially available, the associated acquired in-process technology asset will be deemed definite‑lived and will then be amortized based on its estimated useful life. |