CareDx, Inc. Goodwill & Intangibles Disclosure

6. GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill is recorded when the purchase consideration of an acquired business exceeds the fair value of the net assets acquired.

The following table presents details of the Company’s goodwill for the year ended December 31, 2017 (in thousands):

As of December 31, 2018, the Company’s goodwill carrying amount of $12 million remains the same.

 The Company tested its goodwill for impairments as of December 1, 2016 and estimated the fair value of the former Pre-Transplant reporting unit was $1.7 million, which was lower than its carrying value. Based on the analysis, the implied fair value of the goodwill was lower than the carrying value of the former Pre-Transplant reporting unit, resulting in a goodwill impairment charge of $13.0 million for the period ended December 31, 2016.  The significant assumptions utilized in the 2016 discounted cash flow analysis for the former Pre-Transplant reporting unit were a discount rate of 16.8%, a terminal growth rate of 3.2%, and a capitalization multiple of 7.37.    

On January 1, 2017, the Company adopted ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminated the Step 2 requirement of the goodwill impairment test. Instead, the goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount.  The Company determined that the decrease in its market capitalization in the first quarter of 2017 constituted an indicator of impairment and therefore a goodwill impairment test was completed as of March 31, 2017.  The goodwill impairment test determined that the fair value of the former Pre-Transplant reporting unit was $3.5 million, which was lower than its carrying value.  Accordingly, the Company recorded a goodwill impairment charge of $2.0 million as of March 31, 2017, which represented the remaining goodwill balance in the former Pre-Transplant reporting unit.  The significant assumptions utilized in the March 31, 2017 discounted cash flow analysis for the former Pre-Transplant reporting unit were a discount rate of 16.6%, a terminal growth rate of 3.2% and a capitalization multiple of 7.48.  

As of December 31, 2017, the remaining goodwill amount of $12.0 million was related to the former Post-Transplant reportable segment only. Management performed a goodwill impairment analysis and concluded that goodwill was not impaired.

On December 1, 2018, with consideration to the change to one reporting unit (see Note 16) the Company performed a qualitative assessment of its reporting unit taking into consideration past, current and projected future earnings, recent trends and market conditions; and its market capitalization. Based on this analysis, the Company concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying amount. As such, it was not necessary to perform the quantitative goodwill impairment assessment at this time. As of December 31, 2018, no impairment of goodwill has been identified.

Intangible Assets

The following tables present details of the Company’s intangible assets as of December 31, 2018 (in thousands):

The following tables present details of the Company’s intangible assets as of December 31, 2017 (in thousands):

 

The net carrying amount of intangible assets and the related amortization expense of intangible assets may change due to the effects of foreign currency fluctuations as a result of acquiring an entity with a functional currency other than the U.S. dollar.  Amortization expense was $2.4 million for the year ended December 31, 2018, of which $1.4 million, and $1.0 million were amortized to cost of product and sales and marketing expenses, respectively.  Amortization expense was $2.6 million for the year ended December 31, 2017, of which $1.5 million, $1.0 million and $0.1 million were amortized to cost of product, sales and marketing and cost of testing services, respectively.  Amortization expense was $1.7 million for the year ended December 31, 2016, of which $1.0 million and $0.7 million were amortized to cost of product and sales and marketing expenses, respectively.

Intangible assets are carried at cost less accumulated amortization.  Amortization expenses are recorded to cost of product and sales and marketing expenses in the consolidated statements of operations.  The acquired in process technology of $6.7 million achieved technological feasibility in the fourth quarter of 2017, with the launch of AlloSure.

The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of December 31, 2018 (in thousands):