Goodwill and Intangible Assets

12 Months Ended

Dec. 31, 2016

Goodwill And Intangible Assets Disclosure [Abstract]

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.

The following table presents details of the Company’s goodwill for the year ended December 31, 2016 (in thousands):

	CareDx		Allenex			Total
Balance as of December 31, 2015	$	12,005	$	—		$	12,005
Goodwill acquired	—			16,922			16,922
Goodwill impairment	—			(13,021	)		(13,021	)
Foreign currency translation adjustments	—			(2,067	)		(2,067	)
Balance as of December 31, 2016	$	12,005	$	1,834			13,839

The gross carrying amount of goodwill 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.

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. A reporting unit is either the "operating segment level" or one level below, which is referred to as a "component." The level at which the impairment test is performed requires judgment as to whether the operations below the operating segment constitute a self-sustaining business or whether the operations are similar such that they should be aggregated for purposes of the impairment test. The Company has concluded that it has two reporting units: CareDx (associated with the delivery of diagnostic tests) and Olerup (the development and commercialization of diagnostic products).

The Company tested its goodwill for impairments as of December 1, 2016. The Company performed step one of its annual Goodwill impairment test and determined that the fair value of the Olerup reporting unit was $1.7 million, which was lower than its carrying value. A reduction in the Company’s forecasted revenue and operating results for the Olerup reporting unit was the primary cause of the reduction in fair value as compared with the Company’s forecast as of the acquisition of Allenex in April 2016. The Company’s forecasted revenues and operating results were adversely impacted by an earlier-than-expected market adoption of NGS and/or q-PCR technology and increased competition from other companies that compete with or will compete with the Company’s pre-transplant products. The Company was then required to perform the second step of the two-step process for the Olerup reporting unit. The second step of the analysis included allocating the calculated fair value of the reporting unit to its assets and liabilities, using a present value analysis, in order to determine an implied fair value of goodwill. Based on the Company’s analysis, the implied fair value of the goodwill was lower than the carrying value of the Olerup reporting unit. Accordingly, the Company has recorded a goodwill impairment charge of $13.0 million as of December 1, 2016. If the determined fair value of Olerup reporting unit had been 10% lower, the Goodwill impairment charge would have been approximately $630,000 higher. The significant assumptions utilized in the 2016 discounted cash flow analysis for the Olerup reporting unit was a discount rate of 16.8%, a terminal growth rate of 3.2%, and a capitalization multiple of 7.37.

The results of the quantitative test did not result in any impairments of Goodwill for the CareDx reporting unit, as the fair value of the reporting unit exceeded its respective carrying value by more than 75% as of December 1, 2016.

Intangible Assets

The following tables present details of the Company’s intangible assets as of December 31, 2016 (in thousands):

	December 31, 2016
	Acquisition Cost		Accumulated Amortization			Foreign Currency Translation			Net Carrying Amount		Weighted Average Remaining Useful Life (In Years)
Intangible assets with finite lives:
Customer relationships	$	12,650	$	(576	)	$	(1,355	)	$	10,719		14.0
Developed technology: SSP		11,650		(804	)		(1,233	)		9,613		9.0
Acquired technology – QTYPE (a)		4,510		(74	)		(490	)		3,946		14.0
Trademarks		2,260		(103	)		(242	)		1,915		14.0
Acquired contracts	490			(164	)		(45	)		281		1.3
Total intangible assets with finite lives	$	31,560	$	(1,721	)	$	(3,365	)	$	26,474
Acquired in-process technology―dd-cfDNA		6,650		—			—			6,650		—
Total intangible assets	$	38,210	$	(1,721	)	$	(3,365	)	$	33,124

(a)	QTYPE was initially classified as acquired in-process technology upon the acquisition of Allenex on April 14, 2016, and was reclassified as an intangible asset with a finite life when QTYPE was commercially launched at the end of September 2016.

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 $1.7 million for the year ended December 31, 2016, of which $1.0 million and $0.7 million was amortized to cost of product and sales and marketing, respectively. There was no amortization recorded for the year ended December 31, 2015, as the Company only had an intangible asset related to acquired in-process technology with an indefinite useful live in that period.

Intangible assets are carried at cost less accumulated amortization. Amortization expenses are recorded to cost of product and sales and marketing. Acquired IPR&D of $6.7 million has not reached technological feasibility as of December 31, 2016 and is therefore not subject to amortization. As such, the Company excluded amortization of acquired in-process technology from the future amortization expense table below.

The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of December 31, 2016 (in thousands):

Years Ending December 31,	Cost of Product		Sales and Marketing		Total
2017	$	1,568	$	902	$	2,470
2018		1,413		902		2,315
2019		1,350		902		2,252
2020		1,350		902		2,252
2021		1,350		902		2,252
Thereafter		6,809		8,124		14,933
Total future amortization expense	$	13,840	$	12,634	$	26,474

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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