Business Acquisition

12 Months Ended

Dec. 31, 2022

Business Combination and Asset Acquisition [Abstract]

On November 1, 2022, the Company acquired all of the membership interests of Gateway, a San Diego-based personal genomics company and developer of consumer genetic tests that give families insight into their future children.

The acquisition date fair value of the consideration transferred was $68.7 million. Cash consideration amounted to $66.6 million, of which $8.5 million was deposited for general representation and warranty and working capital adjustment purposes in an escrow account, legally owned by the Company. The remaining consideration included contingent cash consideration with a fair value of $2.1 million. The contingent consideration is classified as a liability and has a maximum value of up to $32.5 million based on the achievement of certain performance-based targets. The acquisition date fair value of the contingent consideration was based on the Monte Carlo Method, utilizing various pay-out scenarios that factor in forecasted revenue, earnings before interest, taxes, depreciation and amortization ("EBITDA"), and Prequel and FirstGene test volumes that directly result from the sale of the SneakPeek Gender DNA Test relative to targets for fiscal 2023 and 2024.

The acquisition is being accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date. Management estimated the fair value of tangible and intangible assets and liabilities in accordance with the applicable accounting guidance for business combinations and utilized the services of third-party valuation consultants. The significant assumptions used in the model to estimate the value of the intangible assets included projected cash flows, discount rates, net working capital and long-term growth rate. The initial allocation of the consideration transferred is based on a preliminary valuation and is subject to adjustments. Balances subject to adjustment primarily include the valuations of acquired assets (tangible and intangible), liabilities assumed, as well as tax-related matters. During the measurement period, the Company may record adjustments to the provisional amounts recognized.

Management estimated that consideration paid exceeded the fair value of the net assets acquired. Therefore, goodwill of $48.7 million was recorded. The goodwill recognized is primarily attributable to the expected synergies to be achieved from the business combination and is deductible for income tax purposes. The following table summarizes the estimated fair value of identified assets acquired and liabilities assumed at the date of acquisition.


(in thousands)	Estimated fair value
Identifiable assets acquired
Current assets	$	1,053
Inventory	1,900
Intangible assets
Developed technology	10,100
Trademarks	6,100
Customer relationships	1,600
Total intangible assets	17,800
Other non-current assets	161
Total identifiable assets acquired	20,914
Liabilities assumed
Accounts payable	(246)
Accrued liabilities	(693)
Total liabilities assumed	(939)
Net identifiable assets acquired	19,975
Goodwill	48,723
Total fair value of Purchase Price	$	68,698

Identifiable Intangible Assets

The fair values of the identifiable intangible assets and related useful lives were determined using an income approach discounting expected future cash flows to present value at a discount rate of 15.5%. The discount rate was based on the estimated internal rate of return for the acquisition and represents the rate that market participants might use to value the intangible assets. The Company will amortize the intangible assets on a straight-line basis over their estimated useful lives. The estimated useful life of the customer relationships and trademarks is 10 years and the estimated useful life of the developed technology is 8 years.

Transactions Separate From the Business Acquisition

In connection with the business acquisition, the Company also recognized certain transactions which were accounted for separately from the acquisition of assets and assumptions of liabilities in the business acquisition. Compensation expense of $1.9 million was paid at the closing of the transaction pursuant to a retention arrangement with Gateway employees that was negotiated in connection with their retention by the Company. Receipt of the additional amounts available under the retention arrangement is contingent upon future service from the employees and the achievement of certain performance-based targets related to revenue and EBITDA. The $1.9 million of compensation expense is recognized in Selling, general, and administrative expense in the Consolidated Statement of Operations for the year ended December 31, 2022.

The Company also incurred approximately $3.1 million of acquisition-related costs in connection with the acquisition of Gateway, which has been recognized as an expense in Selling, general, and administrative expense in the Consolidated Statement of Operations in the period incurred.

Pro Forma Information (Unaudited)

The unaudited pro forma results presented below include the effects of Gateway acquisition as if it had been consummated as of January 1, 2021, with adjustments to give effect to pro forma events that are directly attributable to the acquisition, which includes adjustments related to the amortization of acquired intangible assets, interest income and expense, and depreciation.

The unaudited pro forma results do not reflect any operating efficiency or potential cost savings that may result from the consolidation of Gateway with the Company. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operation of the combined company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations and are not necessarily indicative of results that might have been achieved had the acquisition been consummated as of January 1, 2021. The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business acquisition included in the reported pro forma earnings.


	Years Ended December 31,
(in thousands)	2022		2021
Revenue	$	695,632	$	709,132
Net loss	(112,185)		(28,686)

Revenue and net loss from Gateway included in the Company's Consolidated Statements of Operations since the acquisition date through December 31, 2022 is $3.3 million and $2.8 million, respectively. Of the $2.8 million net loss recognized, $1.9 million is the compensation expense paid at the closing of the transaction discussed above.