Acquisition of Bellwether Bio

12 Months Ended

Dec. 31, 2019

In April 2019, the Company purchased of all of the outstanding shares of Bellwether Bio, Inc. (“Bellwether Bio”), a privately-held company developing a method for early blood-based cancer detection. The Company accounted for the acquisition as a business combination. The total purchase consideration was $8.7 million, which consisted of i) $7.6 million in cash paid upon closing; and ii) future contingent consideration liability with a fair value of $1.1 million on the acquisition date. The contingent consideration is subject to the achievement of certain commercialization milestones with a maximum payout amount of $10.0 million. The Company will also pay additional earn-out consideration of up to $10.0 million subject to the achievement of certain commercialization milestones and the continued provision of services to the Company by certain former employees and consultants of Bellwether Bio. The contingent consideration and earn-out consideration may be paid, at the Company’s election, in cash or in the Company’s common stock. As of December 31, 2019, the Company did not believe the earn-out consideration is probable to be achieved, and therefore, did not record any compensation expense.

The excess purchase consideration over the fair value of assets acquired and liabilities assumed was recorded as goodwill. Goodwill is attributable to future revenue opportunities that we expect to achieve from leveraging Bellwether Bio’s existing license and IPR&D, as well as the assembled workforce. The valuation of the intangible assets acquired was determined using currently available information and reasonable assumptions. The following table summarizes the allocation of the total consideration to the estimated fair values of assets acquired and liabilities assumed:



	Amount
	(in thousands)
Cash	$	521
Identified intangible assets	6,700
Goodwill	3,289
Net liabilities assumed	(1,802		)
Total	$	8,708

The following table presents details of the identified intangible assets acquired from the Bellwether Bio acquisition:



	Fair Value		Estimated Useful Life
	(in thousands)
Acquired license	$	5,100	10 years
IPR&D	1,600		*
Total	$	6,700


*	IPR&D assets are not subject to amortization.

In connection with the acquisition of Bellwether Bio, the Company also entered into non-compete agreements with certain key individuals based on their experience and importance to the operation of Bellwether Bio. The Company accounted for the covenants not to compete as purchases of intangible assets separate from the business combination as these non-compete agreements were initiated by the Company to protect its interests. The fair value of acquired covenants not to compete was estimated to be $2.5 million, which is recorded within intangible assets on the consolidated balance sheet and will be amortized over an estimated useful life of 6 years using the straight-line method.

The following table presents other intangible assets - net:



		As of December 31, 2019
		(in thousands)
	Weighted Average Useful Life	Gross		Accumulated Depreciation		Net
Acquired license	9.5	$	5,100	$	373	$	4,727
Non-compete agreements	5.5	2,500		303		2,197
		$	7,600	676		$	6,924

IPR&D		$	1,600	—		$	1,600
Goodwill		3,290		—		3,290
Total intangible assets		$	12,490	$	676	$	11,814

There were no intangible assets as of December 31, 2018.

The following table summarizes estimated future amortization expense of finite-lived intangible assets—net:



Years	Amount
	(in thousands)
2020	$	928
2021	928
2022	928
2023	928
2024 and thereafter	3,212
Total	$	6,924

Acquisition-related contingent consideration is measured at fair value on a quarterly basis based on additional information as it becomes available and change in estimated contingent consideration to be paid will be included in

operating expenses in the consolidated statements of operations. The fair value of acquisition-related contingent consideration is estimated using a multiple-outcome discounted cash flow valuation technique. Contingent consideration is classified within Level 3 of the fair value hierarchy, as it is based on a probability that includes significant unobservable inputs. The significant unobservable inputs include a probability-weighted estimate of achievement of certain commercialization milestones, continued services from certain former employees and consultants, resulting contingent payments, and discount rate to present value the expected payments. A significant change in any of these input factors in isolation could have a material impact to fair value measurement.

Since initial valuation on the date of acquisition, contingent consideration liability increased by $0.3 million due to change in estimate relating to inputs used to determine the fair value of contingent consideration. As of December 31, 2019, contingent consideration liability of $1.4 million was recorded within other long-term liabilities on the consolidated balance sheet.

For the period ended December 31, 2019, the Company incurred acquisition-related transaction costs of $0.4 million which are included in general and administrative expenses in the consolidated statements of operations.