Babylon Holdings Limited Registration statement for securities of certain foreign private issuers

Registration statement for securities of certain foreign private issuers

Intangible Assets and Goodwill

Intangible Assets and Goodwill

6 Months Ended

12 Months Ended

Jun. 30, 2021

Dec. 31, 2020

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Intangible Assets and Goodwill

7.	Intangible assets and Goodwill

The changes in the carrying amount of goodwill and intangible assets for the six months ended June 30, 2021 and the year ended December 31, 2020 were as follows:


	Goodwill		Development Costs		Intangibles under Development			Customer Relationships		Trademarks		Choice Physician Network		Licenses		Total other intangible assets (excluding goodwill)
	$’000		$’000		$’000			$’000		$’000		$’000		$’000		$’000
Cost
Balance at January 1, 2020		61		15,559		28,873			—		—		—		—		44,432
Acquisitions through business combinations		17,771		—		—			3,100		3,300		1,500		—		7,900
Additions		—		940		43,027			—		—		—		—		43,967
Transfers		—		51,932		(51,932	)		—		—		—		—		—
Effect of movements in foreign exchange		—		631		1,170			—		—		—		—		1,801

Balance at December 31, 2020		17,832		69,061		21,138			3,100		3,300		1,500		—		98,100
Balance at January 1, 2021		17,832		69,061		21,138			3,100		3,300		1,500		—		98,100
Acquisitions through business combinations		13,471		—		—			10,800		1,900		3,500		590		16,790
Additions		—		—		17,012			—		—		—		—		17,012
Transfers		—		14,903		(14,903	)		—		—		—		—		—
Effect of movements in foreign exchange		—		871		230					—		—		—		1,101

Balance at June 30, 2021		31,303		84,835		23,477			13,900		5,200		5,000		590		133,002
Amortization and impairment
Balance at January 1, 2020		—		680		—			—		—		—		—		680
Amortization for the year		—		10,157		—			845		83		—		—		11,085
Impairment charge		—		6,436		—			—		—		38		—		6,474


	Goodwill		Development Costs		Intangibles under Development		Customer Relationships		Trademarks		Choice Physician Network		Licenses		Total other intangible assets (excluding goodwill)
	$’000		$’000		$’000		$’000		$’000		$’000		$’000		$’000
Effect of movements in foreign exchange		—		1,007		—		—		—		—		—		1,007

Balance at December 31, 2020		—		18,280		—		845		83		38		—		19,246
Balance at January 1, 2021		—		18,280		—		845		83		38		—		19,246
Amortization for the period		—		8,995		—		1,826		212		162		15		11,210
Impairment charge		—		—		—		—		—		—		—		—
Effect of movements in foreign exchange		—		215		—		—		—		—		—		215

Balance at June 30, 2021		—		27,490		—		2,671		295		200		15		30,671
Net book value
At January 1, 2020		—		14,878		28,873		—		—		—		—		43,751
At December 31, 2020 and January 1, 2021		17,832		50,780		21,138		2,255		3,217		1,462		—		78,853

At June 30, 2021		31,303		57,345		23,477		11,229		4,905		4,800		575		102,331

Goodwill of $13,471 thousand (2020: $17,771 thousand) has been acquired through business combinations (Note 3). All development costs, including intangibles under development, have been internally generated by the Group. During the six months ended June 30, 2021, $14,903 thousand (2020: $51,932 thousand) of intangibles under development were transferred to development costs as these projects were completed. Intangibles under development are tested for impairment at least annually.

The total net book value is considered to be the recoverable amount, as this balance is reviewed annually and impaired as necessary. All development costs are related to software and artificial intelligence development and there are no distinguishable individually material intangible assets within the capitalised development costs. There was no impairment of the development costs in the six months ended June 30, 2021 (2020: $6,438 thousand).

15.	Intangible assets and Goodwill

The changes in the carrying amount of goodwill and intangible assets for fiscal years 2020 and 2019 were as follows:


	Goodwill		Development Costs		Intangibles under Development			Customer Relationships		Trademarks		Choice Physician Network		Total other intangible assets (excl goodwill)
	$’000		$’000		$’000			$’000		$’000		$’000		$’000
Cost
Balance at January 1, 2019		—		544		7,591			—		—		—		8,135
Acquisitions through business combinations		61		—		—			—		—		—		—
Additions		—		—		36,036			—		—		—		36,036
Transfers				15,004		(15,004	)
Effect of movements in foreign exchange		—		10		250			—		—		—		260

Balance at December 31, 2019		61		15,558		28,873			—		—		—		44,431


Balance at January 1, 2020		61		15,558		28,873			—		—		—		44,431
Acquisitions through business combinations		17,771		—		—			3,100		3,300		1,500		7,900


	Goodwill		Development Costs		Intangibles under Development			Customer Relationships		Trademarks		Choice Physician Network		Total other intangible assets (excl goodwill)
	$’000		$’000		$’000			$’000		$’000		$’000		$’000
Additions		—		940		43,027			—		—		—		43,967
Transfers				51,932		(51,932	)								—
Effect of movements in foreign exchange		—		632		1,170			—		—		—		1,802

Balance at December 31, 2020		17,832		69,062		21,138			3,100		3,300		1,500		98,100


Amortization and impairment
Balance at January 1, 2019		—		19		—			—		—		—		19
Amortization for the year		—		643		—			—		—		—		643
Impairment charge		—		—		—			—		—		—		—
Effect of movements in foreign exchange		—		18		—			—		—		—		18

Balance at December 31, 2019		—		680		—			—		—		—		680


Balance at January 1, 2020		—		680		—			—		—		—		680
Amortization for the year		—		10,157		—			845		83		38		11,123
Impairment charge		—		6,436		—			—		—		—		6,436
Effect of movements in foreign exchange		—		1,008		—			—		—		—		1,008

Balance at December 31, 2020		—		18,281		—			845		83		38		19,247


Net book value
At January 1, 2019		—		525		7,591			—		—		—		8,116
At December 31, 2019 and January 1, 2020		61		14,878		28,873			—		—		—		43,751

At December 31, 2020		17,832		50,781		21,138			2,255		3,217		1,462		78,853

Goodwill of $17,832 thousand (2019: $61 thousand). has been acquired through business combinations (Note 5). $17,771 thousand is related to the acquisition of Fresno and the acquisition of Health Innovators Inc is attributable to the remaining $61 thousand. Goodwill is allocated to the Fresno CGU and Health Innovators Inc CGU respectively.

All development costs, including intangibles under development, have been internally generated by the Group. During 2020, $51,932 thousand of intangibles under development were transferred to development costs as these projects were completed. Intangibles under development are tested for impairment at least annually.

The total net book value is considered to be the recoverable amount, as this balance is reviewed annually and impaired as necessary (Note 4). All development costs are related to software and artificial intelligence development and there are no distinguishable individually material intangible assets within the capitalized development costs. Following an assessment of the future development of our technology, capitalized development costs were impaired by $6,436 thousand in 2020. This impairment was primarily the result of the discontinuation of certain features in 2020 surrounding a proprietary data structure for encounters on our software platform that were deemed to be no longer technologically feasible.

Impairment Analysis for CGU’s Containing Goodwill and Intangibles

Goodwill and other intangibles are subject to impairment testing on an annual basis or whenever events or circumstances indicate that the carrying amount of an asset may no longer be recoverable. The fair value of Goodwill is generally determined using the discounted cash flow method. As of December 31, 2020, the Fresno CGU was the only CGU with a material amount of goodwill, thus triggering an impairment analysis.

The recoverable amount of the Fresno CGU that included these intangible assets was estimated based on the present value of the future cash flows expected to be derived from the CGU (value in use), assuming a Medicare Advantage growth rate of 8.0% and using a

pre-tax

discount rate of 11.4% and a terminal value growth rate of 3.0% from 2025. The recoverable amount of Fresno CGU’s was estimated to be higher than its carrying amount, and as a result there was no impairment related to Fresno for the fourth quarter of 2020.

The below are factors considered when performing the 2020 sensitivity analysis:

Terminal value growth rate:

Babylon used a terminal growth value of 3.0% which is consistent with what was used to prepare the valuation of the Fresno acquisition. Babylon believes that it is appropriate to be consistent with the terminal growth value used less than 3 months prior and provided by industry experts. Any increase to this produces more headroom and therefore shall not be considered. A 2.5% terminal growth rate would have resulted in a change of $1,321 thousand, and a 2.0% terminal growth rate would have resulted in a change of $2,477 thousand.

Discount factor:

Babylon used a discount factor of 10.0% which is consistent with what was used to prepare the valuation of the Fresno acquisition. Babylon believes that it is appropriate to be consistent with the discount rate used less than 3 months prior. A lower discount rate produces more headroom and therefore shall not be considered. A reduction in the discount rate to 10.5% would have resulted in an NPV change of $1,665 thousand, and a discount rate of 11.0% which would have resulted in an NPV change of $3,312 thousand.

Medicare Advantage Growth Numbers:

Babylon used an expected growth rate in Medicare Advantage member numbers year on year of 8.0%. This growth rate is determined by the Value Based Care teams and the sensitivities in this growth rate are continuously monitored by Babylon. A growth rate higher than 8.0% produces more headroom and therefore shall not be considered. A 7.5% terminal growth rate would have resulted in NPV change of $1,125 thousand, and 7.0% for growth rates which would have resulted in an NPV change of $2,239 thousand.