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 September 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 November 3, 2021, there were 71,043,062 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)
| September 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 | |||||||||||
| Current portion of other liabilities | |||||||||||
| 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 | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ||||||||||
| 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
(Unaudited)
(In thousands, except share and per share amounts)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Testing revenue | $ | $ | $ | $ | |||||||||||||||||||
| Product revenue | |||||||||||||||||||||||
| Biopharmaceutical and other revenue | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of testing revenue | |||||||||||||||||||||||
| Cost of product revenue | |||||||||||||||||||||||
| Cost of biopharmaceutical and other revenue | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Intangible asset amortization | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Other income (loss), net | ( | ( | |||||||||||||||||||||
| Loss before income tax benefit | ( | ( | ( | ( | |||||||||||||||||||
| Income tax benefit | ( | ( | |||||||||||||||||||||
| Net 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.
2
VERACYTE, INC.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive loss: | |||||||||||||||||||||||
| Change in currency translation adjustments | ( | ( | |||||||||||||||||||||
| Net comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
VERACYTE, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(In thousands)
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
| Issuance of common stock for acquisition | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock on 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 | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||||||||
Sale of common stock in a public offering, net of offering costs of $ | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock for acquisition | — | — | $ | ||||||||||||||||||||||||||||||||
| 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 | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Comprehensive loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
VERACYTE, INC.
Condensed Consolidated Statements of Stockholders' Equity (Continued)
(Unaudited)
(In thousands)
| Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Equity | ||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
Sale of common stock in a public offering, net of offering costs of $ | — | ||||||||||||||||||||||||||||
| Issuance of common stock on 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 September 30, 2020 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
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 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 September 30, 2020 | $ | $ | $ | ( | $ | ||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
VERACYTE, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
| Nine Months Ended September 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 Decipher Biosciences, net of cash acquired | ( | ||||||||||
| Acquisition of HalioDx, net of cash acquired | ( | ||||||||||
| Proceeds from sale of equity securities | |||||||||||
| Purchase 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 long-term debt | ( | ||||||||||
| 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) increase in cash, cash equivalents and restricted cash | ( | ||||||||||
| Effect of foreign currency on cash, cash equivalents and restricted cash | ( | ||||||||||
| Net (decrease) increase 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 | $ | $ | |||||||||
| Issuance of common stock for acquisition of HalioDx | $ | $ | |||||||||
Cash, Cash Equivalents and Restricted Cash:
| September 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.
6
1. Organization, Description of Business and Summary of Significant Accounting Policies
Veracyte, Inc., or Veracyte, or the Company, is a global diagnostics company that improves patient care by answering important clinical questions to inform diagnosis and treatment decisions throughout the patient journey in cancer and other diseases. 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 unnecessary and potentially harmful procedures and interventions, and accelerate time to more appropriate treatment. In addition to making its 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. In August 2021, Veracyte acquired HalioDx SAS, giving Veracyte the ability to manufacture its own in vitro diagnostic tests for use on the nCounter, while also deepening Veracyte’s scientific capabilities into immuno-oncology and expanding its presence into eight of the ten most common cancers by incidence in the United States that impact patients globally.
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 headquarters are in South San Francisco, California, and it also has operations in San Diego, California; Austin, Texas; Richmond, Virginia; Vancouver, Canada; and Marseille, France. It performs diagnostic testing in its Clinical Laboratory Improvement Amendments of 1988, or CLIA, certified laboratories in South San Francisco, San Diego, Austin, Richmond and Marseille.
Veracyte’s foundational approach for its tests, or classifiers, begins with determining what clinical questions need to be answered in order to inform what happens next for the patient. The Company deploys rigorous science and technology to develop and validate its tests and collects extensive clinical utility data to demonstrate the tests’ ability to influence care. This approach has enabled the Company to obtain Medicare reimbursement for its genomic classifiers in each of its clinical indications. The Company positions its tests to integrate seamlessly into the way physicians currently evaluate patients, to facilitate adoption.
Veracyte currently offers genomic tests, which it believes are changing patient care in lung cancer (Percepta); prostate and bladder urologic cancers (Decipher); thyroid cancer (Afirma); breast cancer (Prosigna); and interstitial lung diseases, or ILD, including idiopathic pulmonary fibrosis, or IPF (Envisia). The Company’s genomic classifiers in each of these indications are covered by Medicare. Additionally, through its acquisition of HalioDx, the Company also offers a clinically validated immuno-oncology test in colon cancer (Immunoscore).
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 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 for use as a companion diagnostic with Acerta Pharma’s and AstraZeneca’s Calquence. Both tests are designed for use on the nCounter Analysis System. The Prosigna test kits and associated products are sold to laboratories and hospitals globally. Additionally, the Company’s Immunoscore Colon Cancer test is performed in Veracyte’s CLIA-certified laboratories in Marseille, France, and Richmond, Virginia.
Veracyte’s scientific approach and capabilities in genomics and immuno-oncology also provide multiple opportunities for partnerships with biopharmaceutical and diagnostic testing companies. In developing and commercializing its products, the Company has built or gained access to unique data and sample biorepositories, and proprietary technology and bioinformatics that it believes are important to the development of new targeted therapies, determining clinical trial eligibility and guiding treatment selection.
On August 2, 2021, Veracyte acquired HalioDx SAS, a French société par actions simplifiée, or HalioDx, an immuno-oncology diagnostics company providing oncologists and drug development organizations with diagnostic products and biopharmaceutical services to guide cancer care and contribute to precision medicine. Veracyte believes the acquisition provides three strategic benefits to the company: 1.) it provides Veracyte with the expertise to develop and manufacture IVD test kits for the nCounter diagnostics platform; 2.) it deepens the company’s scientific capabilities into immuno-oncology; and 3.) it expands Veracyte’s cancer diagnostic scope to eight of the top 10 cancers by U.S. incidence. Veracyte paid $321 million
7
in total consideration to HalioDx security holders, consisting of $170 million in cash, $147 million in stock and $4 million in incurred liabilities.
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 September 30, 2021 the condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020, the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2021 and 2020, the condensed consolidated statements of stockholders' equity for the three and nine months ended September 30, 2021 and 2020, and the condensed consolidated statements of cash flows for the nine months ended September 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 as of December 31, 2020 has been derived from audited financial statements. The results for the three and nine months ended September 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; stock options; income tax uncertainties, including a valuation allowance for deferred tax assets; an allowance for credit losses 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. 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
8
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 other than exchange rate losses related to foreign currency denominated accounts.
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 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.
Through September 30, 2021, most of the Company’s revenue has been derived from the sale of Afirma and Decipher testing. To date, Afirma and Decipher testing have been delivered primarily to physicians in the United States.
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 September 30, 2021.
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 September 30, | Nine Months Ended September 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:
| September 30, 2021 | December 31, 2020 | ||||||||||
| Medicare | % | % | |||||||||
| UnitedHealthcare | % | % | |||||||||
Restricted Cash
9
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. The Company bills for testing services at the time of test completion as defined by the delivery of test results. The Company recognizes revenue 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 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 $0.5 million and $0.9 million for the three and nine months ended September 30, 2021, respectively. These adjustments resulted in decreases in the Company's loss from operations of $0.5 million and $0.9 million for the three and nine months ended September 30, 2021, respectively. These adjustments resulted in a decrease in basic and diluted net loss per share of $0.01
During 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 $0.3 million and $1.2 million for the three and nine months ended September 30, 2020, respectively. These adjustments resulted in decreases in the Company's loss from operations of $0.3 million and $1.2 million and a decrease in basic and diluted net loss per share of zero 0.02
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. 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 nine months ended September 30, 2021 or 2020.
Biopharmaceutical and Other Revenue
The Company enters into arrangements for research and development, commercialization, contract manufacturing and contract testing services. Such arrangements may require the Company to deliver various rights, manufactured diagnostic test kits, 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; payments on delivery of data, test results or manufactured products; costs of service plus margin; 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 and other revenue. Milestone payments which fall under the scope of ASC Topic 808, Collaborative Arrangements, or ASC 808, are classified under collaboration revenue. Payments received that are not related to sales or services to a customer or collaboration revenue are recorded as offsets against research and development expense or cost of biopharmaceutical and other revenue in the Company's condensed consolidated statements of operations.
In arrangements involving more than one good or service, each required good or service 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
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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 is transferred which may be at a point in time or over time. 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 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 either party’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 either party’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 revenues and earnings in the period of adjustment. Revisions to the Company’s estimate of the transaction price may also result in negative revenues and earnings in the period of adjustment.
Accounts receivable from biopharmaceutical and other revenue was $9.2 million at September 30, 2021 and $0.4 million at December 31, 2020. There was $4.0 million and $1.0 million of deferred revenue related to these agreements at September 30, 2021 and December 31, 2020, respectively. Revenues included in biopharmaceutical and other revenue for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands of dollars):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Development services | $ | $ | $ | $ | |||||||||||||||||||
| Provision of data | |||||||||||||||||||||||
| Milestones | |||||||||||||||||||||||
| Development rights | |||||||||||||||||||||||
| Contract manufacturing | |||||||||||||||||||||||
| Contract testing | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
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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 nine months ended September 30, 2021, the Company recognized $0.1 million and $0.4 million, respectively, of revenue under these contracts, which is included in biopharmaceutical and other revenue. For the three and nine months ended September 30, 2020, the Company recognized $0.3 million and $1.9 million, respectively, of revenue under these contracts. Accounts receivable from Johnson & Johnson related to these contracts was $0.1 million at September 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 September 30, 2021 and December 31, 2020, respectively.
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.
Cost of Biopharmaceutical and Other Revenue
French Research Tax Credits
The French research tax credits (“crédit d’impôt recherche” or “CIR”) is generated by the Company’s wholly owned subsidiary, HalioDx, in connection with its research efforts performed in Marseille, France. The Company recognizes other income from the CIR over time based on when the research and development expenses are incurred and includes the CIR in prepaids and other current assets on the condensed consolidated balance sheets.
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Foreign Currency Translation
The functional currency of the Company’s foreign subsidiary HalioDx is the Euro. Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using the exchange rates at the balance sheet date. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Revenues and expenses from the Company’s foreign subsidiaries are translated using the monthly average exchange rates in effect during the period in which the transactions occur. Foreign currency transaction gains and losses are recorded in other (loss) income, net, on the condensed consolidated statements of operations.
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. 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 outstanding common stock equivalents have been excluded from diluted net loss per common share because their inclusion would be anti-dilutive:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Shares of common stock subject to outstanding options | |||||||||||||||||||||||
| Employee stock purchase plan | |||||||||||||||||||||||
| Restricted stock units | |||||||||||||||||||||||
| Total common stock equivalents | |||||||||||||||||||||||
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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 | |||||
| Goodwill acquired - HalioDx | |||||
| Effect of foreign currency translation on Goodwill acquired - HalioDx | ( | ||||
Balance as of September 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):
| September 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 | ( | ||||||||||||||||||||||||||||||||||||||||
| HalioDx developed technology | ( | ||||||||||||||||||||||||||||||||||||||||
| HalioDx customer relationships | ( | ||||||||||||||||||||||||||||||||||||||||
| HalioDx customer backlog | ( | ||||||||||||||||||||||||||||||||||||||||
| 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 $5.0 million and $1.3 million was recognized for the three months ended September 30, 2021 and 2020, respectively. Amortization expense of $10.5 million and $3.8 million was recognized for the nine months ended September 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):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Accrued compensation expenses | $ | $ | |||||||||
| Accrued other | |||||||||||
| Total accrued liabilities | $ | $ | |||||||||
4. Business Combinations
HalioDx
On August 2, 2021, the Company acquired 100 % of the equity interests (the "HalioDx Acquisition") of HalioDx SAS and 100 % of the equity interest of HalioDx Inc., historically a wholly owned subsidiary of HalioDx SAS, (collectively referred to as “HalioDx”). HalioDx was a privately-held company providing immune-based diagnostic products and services. The consideration to acquire HalioDx was $320.9 million, comprised of $147.1 million in the form of 3.3 million shares of the Company’s common stock based on the Company's share price on the closing date, $4.2 million in liabilities, and the remainder in cash. The Company incurred $7.7 million of transaction costs related to the acquisition of HalioDx, which were recorded as general and administrative expense during the nine months ended September 30, 2021.
In connection with the HalioDx Acquisition, 11,031 unvested HalioDx free ordinary share awards, or free shares, were modified to provide the Company the right to purchase the vested free shares (call option) from the holders and the holders the right to sell the vested free shares to the Company (put option) from time to time through late 2023. As a result of the call and put options, the free shares are liability classified with an initial fair value of $5.1 million, based on the expected settlement amount. As the free shares require the holders to continue to provide services post-combination, the Company included $3.5 million, attributed to pre-combination services, in the purchase price and the remainder will be recorded in post-combination compensation expense, which will be recognized over the period the holders provide services to the Company.
Additionally, in connection with the HalioDx Acquisition, all of HalioDx's equity-classified options that were outstanding prior to the HalioDx Acquisition were terminated and cancelled at the acquisition date. The Company paid holders of vested options cash consideration of $0.4 million and as the payment is related to pre-combination services, the amount was included in the purchase price. The Company also committed to pay cash consideration of $1.5 million to holders of unvested options on the date the employee satisfies the original service requirement. As this payment requires continuing services and is forfeited if the holders' employment is terminated, the amount was considered nonrecurring post-combination compensation expense and will be recognized over the remaining service period.
As part of the agreement, the Company held back $16.8 million of the cash consideration, or the holdback, which will be payable to the founders of HalioDx based on their continuous employment with the Company. Fifty percent of the holdback will be placed in escrow on the founders' behalf on the first anniversary of the closing date and the remainder will be paid directly to the founders on the second anniversary. As this payment is dependent on the founders’ continuing employment and
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