UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2021
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission file number 001-36156
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |||||||||||||||||||||||||
| incorporation or organization) | Identification No.) | |||||||||||||||||||||||||
(Address of principal executive offices, zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||||||||||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| x | Accelerated filer | ¨ | ||||||||||||
| Non-accelerated filer | ¨ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
No x
As of July 23, 2021, there were 67,473,870 shares of common stock, par value $0.001 per share, outstanding.
VERACYTE, INC.
INDEX
| Page No. | ||||||||
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PART I. — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements-(Unaudited)
VERACYTE, INC.
Condensed Consolidated Balance Sheets
(unaudited)
(In thousands, except share and per share amounts)
| June 30, 2021 | December 31, 2020 | ||||||||||
| (See Note 1) | |||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable | |||||||||||
| Supplies | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Right-of-use assets, operating lease | |||||||||||
| Intangible assets, net | |||||||||||
| Goodwill | |||||||||||
| Restricted cash | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Stockholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Current portion of deferred revenue | |||||||||||
| Current portion of acquisition-related contingent consideration | |||||||||||
| Current portion of operating lease liability | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred revenue, net of current portion | |||||||||||
| Deferred tax liability | |||||||||||
| Acquisition-related contingent consideration, net of current portion | |||||||||||
| Operating lease liability, net of current portion | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
VERACYTE, INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
(In thousands, except share and per share amounts)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Testing revenue | $ | $ | $ | $ | |||||||||||||||||||
| Product revenue | |||||||||||||||||||||||
| Biopharmaceutical revenue | |||||||||||||||||||||||
| Total Revenue | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of testing revenue | |||||||||||||||||||||||
| Cost of product revenue | |||||||||||||||||||||||
| Cost of biopharmaceutical revenue | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Intangible asset amortization | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Other (loss) income, net | ( | ( | |||||||||||||||||||||
| Loss before income tax benefit | ( | ( | ( | ( | |||||||||||||||||||
| Income tax benefit | ( | ( | |||||||||||||||||||||
| Net loss and comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per common share, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Shares used to compute net loss per common share, basic and diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VERACYTE, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(In thousands)
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Issuance of common stock on exercise of stock options and vesting of restricted stock units | — | — | |||||||||||||||||||||||||||
| Tax portion of vested restricted stock units | — | — | ( | — | ( | ||||||||||||||||||||||||
| Stock-based compensation expense (employee) | — | — | — | ||||||||||||||||||||||||||
| Stock-based compensation expense (non-employee) | — | — | — | ||||||||||||||||||||||||||
| Stock-based compensation expense (ESPP) | — | — | — | ||||||||||||||||||||||||||
| Net loss and comprehensive loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
Sale of common stock in a public offering, net of offering costs of $ | — | ||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and vesting of restricted stock units | — | — | |||||||||||||||||||||||||||
| Issuance of common stock under employee stock purchase plan (ESPP) | — | — | |||||||||||||||||||||||||||
| Tax portion of vested restricted stock units | — | — | ( | — | ( | ||||||||||||||||||||||||
| Stock-based compensation expense (employee) | — | — | — | ||||||||||||||||||||||||||
| Stock-based compensation expense (non-employee) | — | — | — | ||||||||||||||||||||||||||
| Stock-based compensation expense (ESPP) | — | — | — | ||||||||||||||||||||||||||
| Net loss and comprehensive loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Issuance of common stock on exercise of stock options and vesting of restricted stock units | — | — | |||||||||||||||||||||||||||
| Tax portion of vested restricted stock units | — | — | ( | — | ( | ||||||||||||||||||||||||
| Stock-based compensation expense (employee) | — | — | — | ||||||||||||||||||||||||||
| Stock-based compensation expense (non-employee) | — | — | — | ||||||||||||||||||||||||||
| Stock-based compensation expense (ESPP) | — | — | — | ||||||||||||||||||||||||||
| Net loss and comprehensive loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options and vesting of restricted stock units | — | — | |||||||||||||||||||||||||||
| Issuance of common stock under ESPP | — | — | |||||||||||||||||||||||||||
| Tax portion of vested restricted stock units | — | — | ( | — | ( | ||||||||||||||||||||||||
| Stock-based compensation expense (employee) | — | — | — | ||||||||||||||||||||||||||
| Stock-based compensation expense (non-employee) | — | — | — | ||||||||||||||||||||||||||
| Stock-based compensation expense (ESPP) | — | — | — | ||||||||||||||||||||||||||
| Net loss and comprehensive loss | — | — | — | ( | ( | ||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VERACYTE, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| Six Months Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating activities | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation | |||||||||||
| Benefit from income taxes | ( | ||||||||||
| Interest on end-of-term debt obligation | |||||||||||
| Write-down of excess supplies | |||||||||||
| Noncash lease expense | |||||||||||
| Revaluation of acquisition-related contingent consideration | ( | ||||||||||
| Effect of foreign currency on operations | |||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Supplies | ( | ( | |||||||||
| Prepaid expenses and other current assets | ( | ( | |||||||||
| Other assets | ( | ||||||||||
| Operating lease liability | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Accrued liabilities and deferred revenue | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Investing activities | |||||||||||
| Acquisition of business, net of cash acquired | ( | ||||||||||
| Proceeds from sale of equity securities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Proceeds from the issuance of common stock in a public offering, net of issuance costs | |||||||||||
| Payment of taxes on vested restricted stock units | ( | ( | |||||||||
| Proceeds from the exercise of common stock options and employee stock purchases | |||||||||||
| Net cash provided by financing activities | |||||||||||
| Decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Effect of foreign currency on cash, cash equivalents and restricted cash | ( | ||||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplementary cash flow information: | |||||||||||
| Purchases of property and equipment included in accounts payable and accrued liability | $ | $ | |||||||||
| Interest paid on debt | $ | $ | |||||||||
Cash, Cash Equivalents and Restricted Cash:
| June 30, 2021 | December 31, 2020 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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1. Organization, Description of Business and Summary of Significant Accounting Policies
Veracyte, Inc., or Veracyte, or the Company, is a global genomic diagnostics company that improves patient care by answering important clinical questions to inform diagnosis and treatment decisions throughout the patient journey. The company’s growing menu of tests leverage advances in genomic science and machine learning technology to change care for patients, enabling them to avoid risky, costly procedures and accelerate time to more appropriate treatment. In addition to making its genomic tests available in the United States through its central laboratories, the company believes its exclusive access to the nCounter Analysis System, a best-in-class diagnostics platform, positions the company to deliver its tests to patients worldwide through laboratories and hospitals that can perform them locally. With its acquisition of Decipher Biosciences, Inc. in March 2021, the company now has a presence in seven of the ten most common cancers impacting patients in the United States.
Veracyte was incorporated in the state of Delaware on August 15, 2006 as Calderome, Inc. Calderome operated as an incubator until early 2008. On March 4, 2008, the Company changed its name to Veracyte, Inc. The Company’s operations are based in South San Francisco, California and Austin, Texas. On March 12, 2021, the Company acquired Decipher Biosciences, Inc., or Decipher Biosciences, with operations based in San Diego, California.
Veracyte utilizes a foundational approach for all of its genomic tests, or classifiers, which begins with determining what clinical questions need to be answered in order to change what happens next for the patient. The Company then deploys rigorous science and technology to develop and validate its tests, and then collects extensive clinical utility data to demonstrate the tests’ ability to change care as intended. This approach has enabled the Company to obtain Medicare reimbursement for its genomic classifiers in each of its commercial indications. The Company positions its tests to integrate seamlessly into the way physicians currently evaluate patients in order to facilitate adoption.
Veracyte develops its genomic tests using advanced scientific methods, such as RNA whole-transcriptome analysis and machine learning, and then optimizes the assays and classifiers for the platform on which the test will be performed. Historically, the Company has utilized RNA whole-transcriptome analysis to perform its tests in its Clinical Laboratory Improvement Amendments of 1988, or CLIA, certified laboratories in South San Francisco and San Diego. With Veracyte’s exclusive global access to the nCounter Analysis System, the Company is positioned to deliver its tests to patients worldwide through laboratories and hospitals that can perform the tests locally.
Veracyte currently offers genomic tests in lung cancer; breast cancer; prostate cancer; thyroid cancer; and interstitial lung diseases, or ILD, including idiopathic pulmonary fibrosis, or IPF.
Lung Cancer - Percepta Genomic Sequencing Classifier. The Percepta classifier improves lung cancer diagnosis when diagnostic bronchoscopy results are inconclusive. This second-generation test was developed using the Company's RNA whole-transcriptome sequencing and machine learning platform and was commercially introduced in June 2019. The Percepta classifier identifies patients with lung nodules who are at low risk of cancer and may avoid further, invasive procedures as well as patients at high risk of cancer so they may obtain faster diagnosis and treatment. The test is built upon foundational "field of injury" science - through which genomic changes associated with lung cancer in current and former smokers can be identified with a simple brushing of a patient's airway - without the need to sample the often hard-to-reach nodule directly.
Breast Cancer - Prosigna Breast Cancer Prognostic Gene Signature Assay. The Prosigna test, acquired in December 2019 through the Company's strategic transaction with NanoString Technologies, Inc., or NanoString, uses advanced genomic technology to inform next steps for patients with early-stage breast cancer, based on the genomic make-up of their disease. The test uses a set of 50 genes known as the PAM50 gene signature and can provide a breast cancer patient and physician with a prognostic score that indicates the probability of cancer recurrence over ten years. Physicians use Prosigna to help guide therapeutic decisions so that patients receive a therapeutic intervention, such as chemotherapy, only if clinically warranted. Patient test results outside of the United States include intrinsic breast cancer subtypes to complement the risk-of-recurrence score.
Prostate Cancer – Decipher Prostate Biopsy and Radical Prostatectomy, or RP, Genomic Classifiers. The Decipher Prostate cancer tests, developed through RNA whole-transcriptome analysis, predict a patient’s risk of
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progressing to metastatic disease, which helps physicians determine an appropriate treatment plan for patients. The Decipher Prostate Biopsy test is used with patients following a cancer diagnosis to inform whether the patient is a candidate for active surveillance, if they need monotherapy, or if they may benefit from multi-modality or intensified therapy. The Decipher Prostate RP test is used following surgery to guide decision-making regarding treatment timing following radical prostatectomy and whether patients undergoing salvage radiotherapy may benefit from the addition of hormone therapy.
Thyroid Cancer - Afirma Genomic Sequencing Classifier, or GSC, and Xpression Atlas. The Company's Afirma offerings comprise the Afirma GSC and Xpression Atlas, which help guide next steps for patients with potentially cancerous thyroid nodules. The offerings are intended to provide physicians with clinically actionable results from a single fine needle aspiration, or FNA biopsy. The Afirma GSC was developed with RNA whole-transcriptome sequencing and machine learning, and is used to identify patients with benign thyroid nodules among those with indeterminate cytopathology results in order to rule out unnecessary thyroid surgery.
The Afirma Xpression Atlas complements the Afirma GSC by providing genomic alteration content from the same FNA samples used in Afirma GSC testing to help physicians decide with greater confidence on the surgical or therapeutic pathway for their patients. The Company commercially launched the Afirma Xpression Atlas in 2018 and in April 2020 introduced an expanded version of the test, which includes significantly more genomic content.
ILD/IPF - Envisia Genomic Classifier. The Envisia classifier improves diagnosis of ILDs, including IPF, without the need for surgery. The test identifies the genomic pattern of usual interstitial pneumonia, or UIP, a hallmark of IPF, with high accuracy on patient samples that are obtained through transbronchial biopsy, a nonsurgical procedure that is commonly used in lung evaluation.
The Company performs its genomic tests for thyroid cancer, lung cancer and IPF in its CLIA-certified laboratory in South San Francisco, California and its genomic tests for prostate and bladder cancer in its College of American Pathologists, or CAP, accredited and CLIA-certified laboratory in San Diego, California. In December 2019, the Company acquired from NanoString, Inc. the exclusive global diagnostics license to the nCounter Analysis System and the Prosigna Breast Cancer Prognostic Gene Signature Assay, which is commercially available, along with the LymphMark lymphoma subtyping assay, which is in development. Both tests are designed for use on the nCounter Analysis System. The Prosigna test kits and associated products are sold to laboratories and hospitals in global markets including the United States.
Veracyte’s whole-transcriptome approach, including RNA sequencing, also provides multiple opportunities for partnerships with biopharmaceutical and diagnostic testing companies. In developing its products, the Company has built or gained access to unique biorepositories, proprietary technology and bioinformatics that it believes are important to the development of new targeted therapies, determining clinical trial eligibility and guiding treatment selection. Additionally, the Company believes that the nCounter Analysis System provides an attractive distributed platform for other diagnostic companies seeking to make their genomic tests available to global markets.
On July 13, 2021, the Company entered into an agreement to acquire HalioDx SAS, a French société par actions simplifiée, or HalioDx. HalioDx is an immuno-oncology diagnostics company providing oncologists and drug development organizations with diagnostic products and services to guide cancer care and contribute to precision medicine. Upon the closing of the transaction, HalioDx will become a subsidiary of Veracyte. At closing, Veracyte will pay approximately €260 million in total consideration to HalioDx security holders, consisting of approximately €147 million in cash and up to approximately €113 million in stock, subject to customary purchase price adjustments. The acquisition is expected to close in the third quarter of 2021.
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of June 30, 2021 the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2021 and 2020, the condensed consolidated statements of
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stockholders' equity for the three and six months ended June 30, 2021 and 2020, and the condensed consolidated statements of cash flows for the six months ended June 30, 2021 and 2020 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of its financial position, operating results, stockholders' equity and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2020 has been derived from audited financial statements. The results for the three and six months ended June 30, 2021 are not necessarily indicative of the results expected for the full year or any other period. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company operates in one segment.
The accompanying interim period condensed consolidated financial statements and related financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Use of Estimates
The preparation of unaudited interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Items subject to such estimates include: revenue recognition; write-down of supplies; the useful lives of property and equipment; the recoverability of long-lived assets; the incremental borrowing rate for leases; accounting for acquisitions; the estimation of the fair value of intangible assets and contingent consideration; variable interest entity assessment; stock options; income tax uncertainties, including a valuation allowance for deferred tax assets; reserve on accounts receivable and contingencies. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions.
Issuance of Common Stock in a Public Offering
On February 9, 2021, the Company issued and sold 8,547,297 shares of common stock in a registered public offering, including 1,114,864 shares issued and sold upon the underwriters’ exercise in full of their option to purchase additional shares, at a price to the public of $74.00 per share. The Company's net proceeds from the offering were approximately $593.8 million, after deducting underwriting discounts and commissions and offering expenses of $38.7 million.
Cash and Cash Equivalents
Concentrations of Credit Risk and Other Risks and Uncertainties
The worldwide spread of coronavirus, or COVID-19, has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of COVID-19 and the extent to which COVID-19 impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict. If the financial markets or the overall economy are impacted for an extended period, the Company’s liquidity, revenues, supplies, goodwill and intangibles may be adversely affected. The Company considers the effects, to the extent knowable, of the COVID-19 pandemic in developing our estimates.
The majority of the Company’s cash and cash equivalents are deposited with one major financial institution in the United States. Deposits in this institution may exceed the amount of insurance provided on such deposits. The Company has not realized any losses on its deposits of cash and cash equivalents.
Several of the components of the Company’s sample collection kits and test reagents, and the nCounter system and related diagnostic kits are obtained from single-source suppliers. If these single-source suppliers fail to satisfy the Company’s
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requirements on a timely basis, it could suffer delays in being able to deliver its diagnostic solutions, suffer a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results.
The Company is also subject to credit risk from its accounts receivable related to its sales. Credit risk for accounts receivable from testing revenue is incorporated in testing revenue accrual rates as the Company assesses historical collection rates and current developments to determine accrual rates and amounts the Company will ultimately collect. The Company generally does not perform evaluations of customers’ financial condition for testing revenue and generally does not require collateral. The Company assesses credit risk and the amount of accounts receivable the Company will ultimately collect for product, biopharmaceutical and collaboration revenue based on collection history, current developments and credit worthiness of the customer. The estimate of credit losses is not material at June 30, 2021.
Through June 30, 2021, most of the Company’s revenue has been derived from the sale of Afirma. To date, Afirma has been delivered primarily to physicians in the United States. The Company’s third-party payers and other customers in excess of 10% of total revenue and their related revenue as a percentage of total revenue were as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Medicare | % | % | % | % | |||||||||||||||||||
| UnitedHealthcare | % | % | % | % | |||||||||||||||||||
| % | % | % | % | ||||||||||||||||||||
The Company’s third-party payers and other customers in excess of 10% of accounts receivable and their related accounts receivable balance as a percentage of total accounts receivable were as follows at the following dates:
| June 30, 2021 | December 31, 2020 | ||||||||||
| Medicare | % | % | |||||||||
| UnitedHealthcare | % | % | |||||||||
Restricted Cash
The Company had deposits of $749,000 and $603,000 included in long-term assets as of June 30, 2021 and December 31, 2020, respectively, restricted from withdrawal and held by banks in the form of collateral for irrevocable standby letters of credit held as security for the Company's leases.
Revenue Recognition
Testing Revenue
The Company recognizes testing revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers, or ASC 606. Most of the Company’s revenue is generated from the provision of testing services. These services are completed upon the delivery of test results to the prescribing physician, at which time the Company bills for the services. The Company recognizes revenue related to billings based on estimates of the amount that will ultimately be realized. In determining the amount to accrue for a delivered test, the Company considers factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. These estimates require significant judgment by management. Actual results could differ from those estimates and assumptions.
During the first half of 2021, the Company changed its revenue estimates due to actual and anticipated cash collections for tests delivered in prior quarters and recognized additional revenue of $0.2 million and $0.4 million for the three and six months ended June 30, 2021, respectively. These adjustments resulted in decreases in the Company's loss from operations of $0.2 million and $0.4 million for the three and six months ended June 30, 2021, respectively. These adjustments resulted in no
8
change in basic and diluted net loss per share for the three months ended June 30, 2021 and a decrease in basic and diluted net loss per share of $0.01
During the first half of 2020, the Company changed its revenue estimates due to actual and anticipated cash collections for tests delivered in prior quarters and recognized additional revenue of $0.9 million and $0.7 million for the three and six months ended June 30, 2020, respectively. These adjustments resulted in decreases in the Company's loss from operations of $0.9 million and $0.7 million and a decrease in basic and diluted net loss per share of $0.02 0.01
Product Revenue
Product revenue from instruments and diagnostic kits is recognized generally upon shipment or when the instrument is ready for use by the end customer, which is when title of the product has been transferred to the customer. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. Performance obligations are considered satisfied once the Company has transferred control of a product to the customer, meaning the customer has the ability to use and obtain the benefit of the product. The Company recognizes product revenue for satisfied performance obligations only when there are no uncertainties regarding payment terms or transfer of control. Shipping and handling costs incurred for product shipments are included in product revenue. Revenues are presented net of the taxes that are collected from customers and remitted to governmental authorities. There was no revenue from instrument sales for six months ended June 30, 2021 or 2020.
Biopharmaceutical and Collaboration Revenue
From time to time, the Company enters into arrangements for research and development and/or commercialization services. Such arrangements may require the Company to deliver various rights, services and/or samples, including intellectual property rights/licenses, research and development services, and/or commercialization services. The underlying terms of these arrangements generally provide for consideration to the Company in the form of nonrefundable upfront license fees, development and commercial performance milestone payments, royalty payments, and/or profit sharing. Net sales of data or other services to customers are recognized in accordance with ASC 606 and are classified under biopharmaceutical revenue. Certain milestone payments fall under the scope of ASC Topic 808, Collaborative Arrangements, or ASC 808, and are classified under collaboration revenue. Payments received that are not sales or services to a customer or collaboration revenue are recorded as offsets against research and development expense in the Company's consolidated statements of operations and comprehensive loss.
In arrangements involving more than one performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects the Company's best estimate of what the selling price would be if the deliverable was regularly sold by the Company on a stand-alone basis or using an adjusted market assessment approach if selling price on a stand-alone basis is not available.
The consideration allocated to each distinct performance obligation is recognized as revenue when control of the related goods is transferred or services are performed. Consideration associated with at-risk substantive performance milestones is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur. Should there be royalties, the Company utilizes the sales and usage-based royalty exception in arrangements that resulted from the license of intellectual property, recognizing revenues generated from royalties or profit sharing as the underlying sales occur.
As part of the accounting for these arrangements, the Company must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligations. Generally, the estimation of the stand-alone selling price may
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include such estimates as independent evidence of market price, forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatory success. The Company evaluates each performance obligation to determine if they can be satisfied at a point in time or over time, and it measures the services delivered to the collaborative partner which are periodically reviewed based on the progress of the related program. The effect of any change made to an estimated input component and, therefore revenue or expense recognized, would be recorded as a change in estimate. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.
Up-front Fees: If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from the transaction price allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time.
Milestone Payments: At the inception of each arrangement that includes milestone payments (variable consideration), the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s or the collaborative partner’s control, such as non-operational developmental and regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of milestones that are within its or the collaborative partner’s control, such as operational developmental milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues and earnings in the period of adjustment. Revisions to the Company’s estimate of the transaction price may also result in negative collaboration revenues and earnings in the period of adjustment.
Diagnostic Development Agreement with Johnson & Johnson
The Company has entered into contracts with the Lung Cancer Initiative at Johnson & Johnson to cooperate on the development of clinical data, to provide data generated by the Company and to license the right to use data under the Company's intellectual property rights. Under the terms of the agreements, the Company will provide data in exchange for up to $18.0 million in payments from Johnson & Johnson. The Company is also entitled to additional payments of up to $13.0 million, conditioned upon the achievement of certain milestones.
The agreements are considered to be within the scope of ASC 808 with respect to the milestone payments, as the parties are active participants and exposed to the risks and rewards of the collaborative activity. The delivery of data under the collaborative arrangement, which the Company believes is a distinct service for which Johnson & Johnson meets the definition of a customer is within the scope of ASC 606. Using the concepts of ASC 606, the Company has identified the delivery of data as its only performance obligation. The grant of the license is not distinct from other performance obligations as the customer receives benefit only when other performance obligations are met. The Company further determined that the transaction prices under the arrangements are the $18.0 million in payments which was allocated to the obligation to deliver data. The $13.0 million in future potential payments is considered variable consideration because the Company determined that the potential payments are contingent upon regulatory, development and commercialization milestones that are uncertain to occur and, as such, were not included in the transaction price, and will be recognized accordingly as each potential payment becomes probable.
For the three and six months ended June 30, 2021, the Company recognized $0.1 million and $0.3 million, respectively, of revenue under these contracts. For the three and six months ended June 30, 2020, the Company recognized $1.3 million and $1.6 million, respectively, of revenue under these contracts. Accounts receivable from Johnson & Johnson related to these contracts was $0.3 million at June 30, 2021 and zero at December 31, 2020. There was $1.1 million and $1.0 million of deferred revenue related to these agreements at June 30, 2021 and December 31, 2020, respectively.
Other Collaboration and Service Agreements
The Company has entered into agreements with biopharmaceutical companies and other diagnostic companies to provide them with data, development services and the right to develop tests on the nCounter Analysis System. For the three months ended June 30, 2021, the Company recognized biopharmaceutical revenue of $0.7 million for development services,
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$0.4 million for the delivery of data and $0.4 million for the achievement of milestones. For the six months ended June 30, 2021, the Company recognized biopharmaceutical revenue of $1.1 million for development services, $0.4 million for the delivery of data and $0.4 million for the achievement of milestones. For the three months ended June 30, 2020, the Company recognized biopharmaceutical revenue of $1.0 million for the sale of commercial and development rights, $0.5 million for development services and $1.0 million for the achievement of milestones. For the six months ended June 30, 2020, the Company recognized biopharmaceutical revenue of $1.0 million for the sale of commercial and development rights, $0.9 million for development services and $1.0 million for the achievement of milestones. There was $0.1 million and zero of deferred revenue related to these agreements at June 30, 2021 and December 31, 2020, respectively. Accounts receivable from these contracts totaled $1.7 million at June 30, 2021 and $0.4 million at December 31, 2020.
Cost of Testing Revenue
The components of our cost of testing services are laboratory expenses, sample collection expenses, compensation expense, license fees and royalties, depreciation and amortization, other expenses such as equipment and laboratory supplies, and allocations of facility and information technology expenses. Costs associated with performing tests are expensed as the test is processed regardless of whether and when revenue is recognized with respect to that test.
Cost of Product Revenue
Cost of product revenue consists primarily of costs of purchasing instruments and diagnostic kits from third-party contract manufacturers, installation, service and packaging and delivery costs. In addition, cost of product includes royalty costs for licensed technologies included in the Company’s products and labor expenses. Cost of product revenue for instruments and diagnostic kits is recognized in the period the related revenue is recognized. Shipping and handling costs incurred for product shipments are included in cost of product in the condensed consolidated statements of operations and comprehensive loss.
Cost of Biopharmaceutical Revenue
Recent Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. This ASU removes the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this ASU also improve consistency and simplify other areas of Topic 740 by clarifying and amending existing guidance. The revised guidance will be applied prospectively and became effective for the Company beginning January 1, 2021 and the adoption of ASU 2019-12 did not have a material impact on our condensed consolidated financial statements.
2. Net Loss Per Common Share
Basic net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. The following
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outstanding common stock equivalents have been excluded from diluted net loss per common share because their inclusion would be anti-dilutive:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Shares of common stock subject to outstanding options | |||||||||||||||||||||||
| Employee stock purchase plan | |||||||||||||||||||||||
| Restricted stock units | |||||||||||||||||||||||
| Total common stock equivalents | |||||||||||||||||||||||
3. Balance Sheet Components
Goodwill
The changes in the carrying amounts of goodwill were as follows (in thousands of dollars):
| Amounts | |||||
Balance as of December 31, 2020 | $ | ||||
| Goodwill Acquired - Decipher Biosciences | |||||
Balance as of June 30, 2021 | $ | ||||
Intangible Assets, Net
Intangible assets include finite-lived product technology, customer relationships, licenses and trade names and indefinite-lived in-process research and development. Intangible assets consisted of the following (in thousands of dollars):
| June 30, 2021 | December 31, 2020 | Weighted Average Amortization Period (Years) | |||||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||||||||||||||||||
| Percepta product technology | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||
| Prosigna product technology | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Prosigna customer relationships | ( | ( | |||||||||||||||||||||||||||||||||||||||
| nCounter Dx license | ( | ( | |||||||||||||||||||||||||||||||||||||||
| LymphMark product technology | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Decipher product technology | ( | ||||||||||||||||||||||||||||||||||||||||
| Decipher trade names | ( | ||||||||||||||||||||||||||||||||||||||||
| Total finite-lived intangibles | ( | ( | |||||||||||||||||||||||||||||||||||||||
| In-process research and development | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||
Amortization of the finite-lived intangible assets is recognized on a straight-line basis. Amortization expense of $3.7 million and $1.3 million was recognized for the three months ended June 30, 2021 and 2020, respectively. Amortization expense of $5.5 million and $2.5 million was recognized for the six months ended June 30, 2021 and 2020, respectively.
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| Year Ending December 31, | Amounts | ||||
| 2021 remainder of year | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total | $ | ||||
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands of dollars):
| June 30, 2021 | December 31, 2020 | ||||||||||
| Accrued compensation expenses | $ | $ | |||||||||
| Accrued other | |||||||||||
| Total accrued liabilities | $ | $ | |||||||||
4. Business Combination
Decipher Biosciences
On March 12, 2021, the Company acquired 100 % of the equity interests of Decipher Biosciences, a privately-held company developing diagnostic tests in urologic cancers, for approximately $594.7 million, comprised of approximately $550.5 million in the form of upfront cash consideration and the remainder in cash payable post-acquisition of which $43.8 million was paid prior to June 30, 2021. The Company incurred approximately $10.6 million of transaction costs related to the acquisition of Decipher Biosciences which were recorded as general and administrative expense during the three months ending March 31, 2021.
In connection with the acquisition, certain of Decipher Biosciences' equity awards that were outstanding and unvested prior to the acquisition became fully vested per the terms of the merger agreement. The acceleration of vesting required the Company to allocate the fair value of the historical Decipher Biosciences’ employee stock awards attributable to pre-combination service to the purchase price and the remaining amount was considered the Company's nonrecurring post-combination expense. In March 2021, the Company recognized nonrecurring post-combination expense related to the acceleration and cash settlement of unvested historical Decipher Biosciences’ employee stock awards of $25.1 million, all of which was recorded as general and administrative expense during the quarter ended March 31, 2021.
The Company included the financial results of Decipher Biosciences in its consolidated financial statements from the acquisition date, which contributed $18.9 million and $4.1 million of revenue and operating income, respectively, during the three months ended June 30, 2021 and $22.7 million and $4.9 million of revenue and operating income, respectively, during the six months ended June 30, 2021.
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The following table summarizes the purchase price and nonrecurring post-combination compensation expense recorded as a part of the acquisition (in thousands):
| Purchase Price | Nonrecurring Post-Combination Compensation Expense | ||||||||||
| Upfront cash consideration | $ | $ | |||||||||
| Liabilities incurred | |||||||||||
| Total | $ | $ | |||||||||
Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the fair values of assets acquired and liabilities assumed through the Company's acquisition of Decipher Biosciences at the date of acquisition (in thousands):
| Cash and cash equivalents | $ | ||||
| Accounts receivable | |||||
| Supplies inventory | |||||
| Prepaids and other current assets | |||||
| Property and equipment, net | |||||
| Operating lease assets | |||||
| Finite-lived intangible assets | |||||
| Indefinite-lived intangible assets | |||||
| Restricted cash | |||||
| Other assets | |||||
| Total identifiable assets acquired | |||||
| Accounts payable | ( | ||||
| Accrued liabilities | ( | ||||
| Operating lease obligations (current) | ( | ||||
| Operating lease obligations, net of current portion | ( | ||||
| Deferred tax liability | ( | ||||
| Net identifiable assets acquired | |||||
| Goodwill | |||||
| Total purchase price | $ | ||||
Based on the guidance provided in ASC 805, the Company accounted for the acquisition of Decipher Biosciences as a business combination in which the Company determined that Decipher Biosciences was a business which combines inputs and processes to create outputs, and substantially all of the fair value of gross assets acquired was not concentrated in a single identifiable asset or group of similar identifiable assets.
The Company's purchase price allocation for the acquisition is preliminary and subject to revision as additional information about the fair value of the assets and liabilities becomes available. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions and may be subject to change as additional information is received. Primary areas that are not yet finalized are related to accounts receivable, and goodwill. Additional information that existed as of the closing date but not known at the time of this filing may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the closing date.
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During the three months ended June 30, 2021, the Company recorded certain measurement period adjustments due to new information becoming available pertaining to the valuation of accounts receivable and certain other assets. These adjustments were recorded as decreases to goodwill and did not impact the condensed consolidated statement of operations. One of these adjustments relates to cash collections of accounts receivable that existed as of the acquisition date exceeding the initial fair value of accounts receivable recorded on the acquisition date by $1.0
The intangible assets acquired are two in-process research and development, or IPR&D, assets (Metastatic Hormone Sensitive Cancer and Castrate Resistant Cancer), developed technology, and trade names. Additionally, the Company identified certain off-market leases and an intangible asset of $1.8 million is included in operating lease assets which will be amortized over the remaining lease term.
The estimated fair value of the IPR&D is determined using the multi-period excess earnings method which calculates the present value of the estimated revenues and net cash flows derived from the IPR&D once the technologies are developed. The IPR&D is not amortized until it becomes commercially viable and placed in service. At the time when the intangible assets are placed in service the Company will determine a useful life.
The fair value of the finite-lived intangible assets was estimated as follows: (i) the developed technology of $90.0 million was based on a multi-period excess earnings method, and (ii) the trade names of $4.0 million was based on the relief from royalty method. The estimated useful life for the developed technology is 10 years, and the estimated useful life for the trade names is five years . The amortization expense related to finite-lived intangible assets is recorded within the intangible asset amortization financial statement line item.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition resulted in the recognition of $469.0 million of goodwill which the Company believes consists primarily of expanded market and product opportunities, including new areas of genomic testing, as well as the potential expansion of the Company's product offerings in international markets. Furthermore, the acquisition of Decipher Biosciences bolsters the Company's presence to seven of the ten most common cancers impacting patients in the United States, which in turn enhances the Company’s overall prominence in the genomic testing arena. Goodwill created as a result of the acquisition is not deductible for tax purposes. The acquisition advances the Company's objective to improve the lives of patients through innovations in genomic technology tailored for diagnostic, prognostic, and treatment decisions related to urologic cancers.
We recorded an income tax benefit primarily due to net deferred tax liabilities assumed in connection with the acquisition, which provided a future source of income to support the realization of our deferred tax assets and resulted in a release of $3.5 million in the Company's valuation allowance.
Supplemental Pro Forma Information (unaudited)
The unaudited pro forma financial information in the table below summarizes the combined results of operations for Veracyte and Decipher as though the companies had been combined as of January 1, 2020. The pro forma amounts have been adjusted for:
•day 1 expense related to the accelerated vesting of unvested legacy Decipher equity awards,
•transaction expenses incurred by Decipher and us,
•lease expense resulting from the fair value adjustments to the operating lease obligation and operating lease asset,
•amortization expense resulting from the acquired intangible assets,
•the elimination of historical interest expense incurred by Decipher on its debt and debt-like items, and
•income tax benefits resulting from the deferred tax liabilities acquired.
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The following unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved as if the acquisition had taken place as of January 1, 2020 (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | |||||||||||||||||||
| Net Loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Related Party Transactions
Members of Veracyte's board of directors, Dr. Tina S. Nova, Ph.D. and Dr. Robert S. Epstein, M.D., M.S., served on the board of directors of Decipher Biosciences prior to the acquisition of Decipher Biosciences, with Dr. Nova additionally serving as President and Chief Executive Officer of Decipher Biosciences. Pursuant to Veracyte's related party transactions policy, Dr. Nova and Dr. Epstein recused themselves from all discussions of its board of directors related to the acquisition, and the acquisition was approved by each of the non-interested members of the board of directors. In connection with the acquisition, certain Decipher Biosciences equity awards held by Dr. Nova and Dr. Epstein were fully-accelerated and certain incentive bonus payments were made to Dr. Nova pursuant to a management incentive plan established by the Decipher Biosciences board of directors, resulting in payments of approximately $26.5 million and $1.4 million to each of them, respectively. Dr. Nova resigned from Veracyte’s board of directors and now serves as Veracyte's General Manager, Thyroid and Urologic Cancers. Dr. Epstein continues to serve on Veracyte’s board of directors.
5. Fair Value Measurements
The Company records its financial assets and liabilities at fair value. The carrying amounts of certain financial instruments of the Company, including cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
•Level I: Inputs which include quoted prices in active markets for identical assets and liabilities;
•Level II: Inputs other than Level I that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
•Level III: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The fair value of the Company’s financial assets includes money market funds and deposits for leases of the Company's facilities. Money market funds, included in cash and cash equivalents in the accompanying condensed consolidated balance sheets, were $238.8 million and $346.8 million as of June 30, 2021 and December 31, 2020, respectively, and are Level I assets as described above. The deposits for the leases, included in restricted cash in the accompanying condensed consolidated balance sheets, was $749,000 and $603,000 as of June 30, 2021 and December 31, 2020, respectively, and is a Level I asset as described above.
On December 3, 2019, the Company acquired from NanoString the exclusive global diagnostics license to the nCounter Analysis System, the Prosigna breast cancer prognostic gene signature assay, and the LymphMark lymphoma subtyping assay. Pursuant to the terms of the agreement, Veracyte paid NanoString $40.0 million in cash and $10.0 million in Veracyte common stock, and may pay up to an additional $10.0 million in cash, contingent upon the commercial launch of Veracyte diagnostic tests for use on the platform. This contingency was valued at $6.1 million as of the acquisition date and is remeasured to fair value at each reporting date until the contingent consideration is settled. As of June 30, 2021 and December 31, 2020, this
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contingency was remeasured to $7.8 million and $7.6 million, respectively, with the corresponding changes included in general and administrative expense in the Company's condensed consolidated statements of operations and comprehensive loss. The fair value of the contingent consideration includes inputs that are not observable in the market and thus represent a Level III financial liability. The estimation of the fair value of the contingent consideration is based on the present value of the expected payments calculated by assessing the likelihood of when the related milestones would be achieved, discounted using the Company's estimated borrowing rate. These estimates form the basis for making judgments about the carrying value of the contingent consideration that are not readily apparent from other sources. Changes to the forecasts for the achievement of the milestones and the estimates of the borrowing rate can significantly affect the estimated fair value of the contingent consideration. As of June 30, 2021, the achievement of one of the milestones is forecasted to occur within the next 12 months. As a result, $3.4 million of the contingent consideration is included in short term liabilities at June 30, 2021. As of June 30, 2021 and December 31, 2020, the Company calculated the estimated fair value of the milestones using the following significant unobservable inputs:
| Value or Range (Weighted-Average) | ||||||||||||||
| Unobservable input | June 30, 2021 | December 31, 2020 | ||||||||||||
| Discount rate | ||||||||||||||
| Probability of achievement | ||||||||||||||
6. Commitments and Contingencies
Operating Leases
The Company leases office and laboratory facilities in South San Francisco and San Diego, California and Austin, Texas under various non-cancelable lease agreements. The lease terms extend to January 2029 and contain extension of lease term and expansion options. The leases have a weighted average remaining lease term of 5.0 years as of June 30, 2021. The Company had deposits of $749,000 and $603,000 included in long-term assets as of June 30, 2021, and December 31, 2020, respectively, restricted from withdrawal and held by banks in the form of collateral for irrevocable standby letters of credit held as security for the leases.
The Company determined its operating lease liabilities using payments through their current expiration dates and a weighted average discount rate of 6.7 % based on the rate that the Company would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments in a similar economic environment. Operating lease liabilities along with the associated right-of-use assets are disclosed in the accompanying condensed consolidated balance sheets. After the adoption of ASC 842, Leases, the Company classified its deferred rent for tenant improvements with its operating lease right-of-use assets on the consolidated balance sheets. In connection with the acquisition of Decipher Biosciences, the Company identified certain off-market rate leases and has estimated an intangible asset of $1.8 million which is included in operating lease assets and will be amortized over the remaining lease term. See Note 4 for more information on the acquisition of Decipher Biosciences.
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Future minimum lease payments under non-cancelable operating leases as of June 30, 2021 are as follows (in thousands of dollars):
| Year Ending December 31, | Amounts | ||||
| Remainder of 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total future minimum lease payments | |||||
| Less: amount representing interest | |||||
| Present value of future lease payments | |||||
| Less: short-term lease liabilities | |||||
| Long-term lease liabilities | $ | ||||
The Company recognizes operating lease expense on a straight-line basis over the non-cancelable lease period. The following table summarizes operating lease expense and cash paid for amounts included in the measurement of lease liabilities (in thousands of dollars):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Operating lease expense | $ | $ | $ | $ | |||||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | $ | $ | |||||||||||||||||||
Contingencies
From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its condensed consolidated financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company believes there is no legal proceeding pending that could have, either individually or in the aggregate, a material adverse effect on the Company’s condensed consolidated financial statements.
7. Debt
Loan and Security Agreement
On November 3, 2017, the Company entered into a loan and security agreement, or Loan and Security Agreement, with Silicon Valley Bank. The Loan and Security Agreement allows the Company to borrow up to $35.0 million, with a $25.0 million advance term loan, or Term Loan Advance, and a revolving line of credit of up to $10.0 million, or Revolving Line of Credit. The Term Loan Advance was advanced upon the closing of the Loan and Security Agreement and was used to pay the outstanding balance of the Company’s existing long-term debt, which was canceled at that date. The Company had not drawn on the Revolving Line of Credit as of June 30, 2021. Borrowings under the Loan and Security Agreement mature on October 1, 2022. Amounts may be borrowed and repaid under the Revolving Line of Credit up until the earliest of full repayment or maturity of the Loan and Security Agreement, termination of the Loan and Security Agreement, or October 1, 2022.
The Term Loan Advance bears interest at a variable rate equal to (i) the thirty-day U.S. London Interbank Offer Rate, or LIBOR, plus (ii) 4.20 %, with a minimum rate of 5.43 % per annum. Principal amounts outstanding under the Revolving Line of Credit bear interest at a variable rate equal to (i) LIBOR plus (ii) 3.50 %, with a minimum rate of 4.70 % per annum.
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The Company may prepay the outstanding principal amount under the Term Loan Advance plus accrued and unpaid interest and, if the Term Loan Advance is repaid in full, a prepayment premium of $250,000 . In 2019 and 2020, the Company prepaid $24.9 million and $0.1 million, respectively, of the principal amount of the Term Loan Advance. These prepayments did not trigger any prepayment premium because they were partial, not full, repayments of the principal amount.
In addition, a final payment on the Term Loan Advance in the amount of $1.2 million is due upon the earlier of the maturity date of the Term Loan Advance or its payment in full. The Loan and Security Agreement contains customary representations, warranties, and events of default, as well as affirmative and negative covenants. As of June 30, 2021, the Company was in compliance with the loan covenants. The Company’s obligations under the Loan and Security Agreement are secured by substantially all of its assets (excluding intellectual property), subject to certain customary exceptions.
The debt obligation for borrowings made under the Loan and Security Agreement was as follows (in thousands of dollars):
| June 30, 2021 | December 31, 2020 | ||||||||||
| Debt principal | $ | $ | |||||||||
| End-of-term debt obligation | |||||||||||
| Total debt obligation | $ | $ | |||||||||
As of June 30, 2021, the principal balance outstanding was one dollar. Future principal and end-of-term debt obligation payments under the Loan and Security Agreement are $1.2 million and due in 2022. As of June 30, 2021 and December 31, 2020, the accrued interest payable under the Loan and Security Agreement was immaterial.
The end-of-term debt obligation accretes over the term of the Loan and Security Agreement until maturity and is included in interest expense in the Company's condensed consolidated statements of operations and comprehensive loss.
8. Stockholders’ Equity
Common Stock
The Company had reserved shares of common stock for issuance as follows:
| June 30, 2021 | |||||||||||