Business Combinations

3 Months Ended

Mar. 31, 2022

Business Combination and Asset Acquisition [Abstract]

5. Business Combinations

Acquisition of Sixense Enterprises Inc.

Transaction Overview

On October 1, 2021 (the “Closing Date”), the Company closed the acquisition of Sixense Enterprises Inc. (“Sixense”) pursuant to the Agreement and Plan of Merger, dated September 17, 2021 (the “Merger Agreement”), among the Company, Sixense, Seychelles Merger Corporation, a wholly owned subsidiary of the Company, and a stockholders’ agent (the “Merger”). Sixense, a privately held company, specializes in enterprise use of virtual reality hardware and software and has been an integral partner on the development of the Company’s REAL Immersive System portfolio. The Merger allows the Company to streamline its efforts and collaborate more closely on its immersive healthcare offerings.

The Company and Sixense formed a joint venture, MVI Health Inc. (“MVI”), in 2017 for the purpose of exploring healthcare applications of virtual reality technology. At the time of MVI’s formation, the Company contributed cash and in-kind services to MVI and Sixense contributed an exclusive license to use its technology for healthcare applications, each for a 50% equity interest in MVI. In 2018, the Company acquired 40% of the outstanding shares of MVI from Sixense and consolidated the financial results of MVI into the accompanying consolidated financial statements, with the amounts attributable to the non-controlling interest classified separately. As of the Closing Date, the Company and Sixense owned a 90% and 10% equity interest in MVI, respectively.

As a result of the Merger, Sixense became a wholly owned subsidiary of the Company and the Company acquired, among other things, the remaining 10% equity interest in MVI held by Sixense.

The Company accounted for the acquired assets and liabilities assumed from Sixense in accordance with ASC 805 and for its change in ownership interest in MVI as an equity transaction in accordance with ASC 810. The carrying amount of the noncontrolling interest was adjusted to zero, and the difference between the acquisition date fair value of the equity interest acquired of $4.2 million and its carrying amount of $(6.2) million was recognized within additional paid in capital.

Fair Value of Consideration Transferred

The following table summarizes the Closing Date fair value of the consideration transferred (in thousands):


Fair value of common stock issued (1)	$	174,133
Fair value of replacement stock options(2)	80,693
Consideration for settlement of pre-existing liabilities due to Sixense(3)	(3,810)

Total purchase price	$	251,016

(1) The fair value of the 661,877 shares of common stock issued as part of consideration transferred was determined based on the acquisition date closing market price of the Company’s common stock of $263.09.

(2) Per ASC 805, the replacement of stock options or other share-based payment awards in conjunction with a business combination represents a modification of share-based payment awards that must be accounted for in accordance with ASC 718. As a result of the Company’s obligation to issue replacement awards, a portion of the fair-value-based measure of replacement awards is included in measuring the purchase consideration transferred in the business combination. To determine the portion of the replacement awards that is part of the purchase consideration, the Company measured the fair value of both the replacement awards and the historical awards as of the Closing Date, in accordance with ASC 718. The fair value of the replacement awards, whether vested or unvested, was included in the purchase consideration to the extent that pre-acquisition services had been rendered. The fair value of replacement stock options assumed for which pre-acquisition services were rendered of $80.7 million was allocated to the purchase consideration and $25.8 million was recognized immediately in the post-combination financial statements during the three months ended December 31, 2021, as pre-acquisition services were not rendered but the vesting of all stock options was accelerated in connection with the Merger.

(3) In the connection with the Merger, the Company effectively settled pre-existing liabilities due to or on behalf of Sixense.

Fair Value of Consideration Transferred

The preliminary allocation of the purchase price was based upon a third party valuation and the Company’s estimates and assumptions are subject to change within the measurement period (generally one year from the Closing Date).

The following table presents the preliminary allocation of the purchase price for Sixense as of March 31, 2022 (in thousands):


	Acquisition-Date Fair Value		Estimated Useful Life of Finite-Lived Intangible Assets
Tangible assets acquired and (liabilities) assumed:
Cash and cash equivalents	$	2,919
Prepaid expenses and other current and non-current assets	2,063
Deferred tax assets	20,678
Deferred tax liabilities	(19,398)
Accrued liabilities and other current liabilities	(1,341)
Intangible assets acquired:
Developed technology	62,466		8.75 years
In-process research and development	20,823
Net assets acquired	88,210
Fair value of subsidiary stock indirectly acquired through the Merger	4,161
Total net assets acquired	92,371
Goodwill	158,645
Total purchase price	$	251,016

Further adjustments may be necessary as additional information related to the fair values of assets acquired and liabilities assumed is assessed during the measurement period, which may be up to one year from the acquisition date. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments are recognized with the corresponding offset to goodwill. Any adjustments required after the measurement period are recorded in the consolidated statement of operations. No measurement period adjustments were recorded during the three months ended March 31, 2022.

The intangible assets acquired and the fair value of the privately-held subsidiary stock indirectly acquired are Level 3 fair value measurements for which fair value is derived from valuations using inputs that are unobservable and significant to the overall fair value measurement.