VERACYTE, INC. The following discussion and analysis of financial condition and results of operations should be read together with the financial statements and the related notes included in Item 8 of Part II of this Annual Report on Form 10-K. This discussion and analysis contains certain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section entitled "Risk Factors" in Item 1A, and other documents we file with theSecurities and Exchange Commission . Historical results are not necessarily indicative of future results.
Overview
We are a global genomic 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. Our growing menu of tests leverages advances in genomic science and machine learning technology to change care for patients, enabling them to avoid risky, costly procedures and reduce time to appropriate treatment. In addition to making our genomic tests available inthe United States through our central laboratory, we believe our nCounter Analysis instrument is a best-in-class diagnostics platform that positions us to deliver our tests to patients worldwide through laboratories and hospitals that can perform the tests locally. We estimate that our current and near-term pipeline products address an estimated$10 billion global market and that our longer-term pipeline products will enable us to address an estimated$50 billion global market. We design our tests to answer critical questions in the diagnosis, prognosis and treatment of cancer and other diseases and improve patient outcomes, while delivering clinical and economic utility to physicians, payers and the healthcare system. We position our tests to integrate seamlessly into the way physicians currently evaluate patients in order to facilitate adoption. We develop our genomic tests using advanced scientific methods, such as RNA whole-transcriptome sequencing and machine learning, and then optimize the assays and classifiers for the platform on which the test will be performed. Historically, we have utilized RNA sequencing methods performed in our CLIA laboratory inSouth San Francisco, California . Beginning in 2021, we expect to adapt select tests to be performed on the nCounter Analysis System for international distribution of our tests. We currently offer five commercialized genomic tests that we believe are changing disease diagnosis and patient care. All five tests are available inthe United States and one is available internationally. These include the Afirma Genomic Sequencing Classifier, or GSC (its predecessor was the Afirma Gene Expression Classifier, or GEC) for thyroid cancer; the Percepta GSC (its predecessor was the Percepta Bronchial Genomic Classifier) for lung cancer; the Envisia Genomic Classifier for IPF; the Afirma Xpression Atlas, which provides information on the most common and emerging gene alterations associated with thyroid cancer, enabling physicians to confidently tailor surgical and treatment decisions at time of diagnosis; and the Prosigna Breast Cancer Assay for assessing risk of breast cancer distant recurrence, which is available for use on the nCounter platform inthe United States and internationally. We expect to continue expanding our offerings in thyroid cancer, lung cancer, ILD/IPF, breast cancer and lymphoma, as well as other indications that we believe will benefit from our technology and approach. Our product development pipelines address what we believe to be significant market opportunities in early detection, diagnosis, staging/prognosis, therapy selection/surgery and disease monitoring across the aforementioned indications. We plan to commercially introduce four products in 2021: Our nasal swab test for early lung cancer detection and our Percepta Genomic Atlas, which, together with the Percepta GSC, form a comprehensive lung cancer portfolio that we believe may improve lung cancer diagnosis and treatment decisions; our Envisia classifier on the nCounter system for expansion into global markets; and our LymphMark lymphoma subtyping test. We believe our ability to leverage RNA whole-transcriptome sequencing data in large biorepositories of patient-consented samples in oncology and other indications, our strong commercial position in major clinical indications and our global reach, present partnership opportunities for biopharmaceutical companies to enhance their research and development capabilities and for other genomic diagnostics companies to introduce their non-competitive tests to global markets on the nCounter system.
We have formed several biopharmaceutical partnerships, each focused on our current indications to derive value out of our current business or advance future business. Our collaboration with the Lung Cancer Initiative at Johnson & Johnson, which
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began in December 2018 , has helped advance our pipeline, including the launch in
2019 of our Percepta GSC on our RNA whole-transcriptome sequencing platform and
development of the first non-invasive nasal swab test designed for early lung
cancer detection. We have recently expanded our program with Johnson & Johnson
to potentially develop future tests designed to detect lung disease before
cancer develops.
Patients access our tests through their physician. Our Afirma, Percepta and
Envisia tests are used as part of the diagnostic process and genomic testing
services are performed in our CLIA laboratory located in San Francisco,
California and marketed as laboratory developed tests. Cytopathology services
for Afirma testing are performed in our reference laboratory in Austin, Texas .
The Prosigna test is indicated in female breast cancer patients who have
undergone surgery in conjunction with locoregional treatment consistent with
standard of care. This FDA cleared in vitro diagnostic test is performed on the
nCounter Analysis System in laboratories worldwide, as well as in the United
States .
Recent Developments
Acquisition of Decipher
On February 2, 2021 , we entered into a Merger Agreement, with Decipher, which is
a commercial-stage precision oncology company, with a focus in urologic oncology
specific to prostate and bladder cancers, and has a kidney cancer test in
development. Through the planned acquisition, we expect to expand our presence
into seven of the ten most common cancers in the United States , accelerating our
expected revenue growth.
Under terms of the Merger Agreement, Decipher will become our wholly owned
subsidiary. At the Closing, we will pay
The Merger Agreement contains customary representations, warranties, covenants and agreements of Decipher and us. The Closing is anticipated to occur byApril 2021 and is subject to customary closing conditions, including approval by the Decipher stockholders and the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Merger Agreement also provides customary termination rights to each of the parties
Public Offering of Common Stock
OnFebruary 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$593.8 million , after deducting underwriting commissions and offering expenses of$38.7 million .
Impact of COVID-19
InDecember 2019 , a strain of coronavirus was reported inWuhan, China , and began to spread globally, including tothe United States andEurope , in the following months. TheWorld Health Organization has declared COVID-19 to be a pandemic and a public health emergency of international concern. The full impact of the COVID-19 outbreak is inherently uncertain at the time of this report. The COVID-19 outbreak has resulted in travel restrictions and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. As COVID-19 has spread, it has significantly impacted the health and economic environment around the world and many governments have closed most public establishments, including restaurants, workplaces and schools. Our customers, third-party contract manufacturers, suppliers and collaboration partners may be affected by the closure of hospitals, doctors' offices, manufacturing sites, or country borders, among other measures being put in place around the world. Consequent increases in layoffs and furloughs in the medical industry and otherwise during the shutdown are having, and will continue to have, negative impact on the demand for medical care and diagnostic tests, which affects the frequency with which tests are prescribed, and the ability of doctors and hospitals to administer such tests. Further the inability to travel and conduct face-to-face meetings can also make it more difficult to expand utilization of our products into new geographies and to drive awareness of our products. These circumstances had a significant negative impact on our financial results during 2020. 67 -------------------------------------------------------------------------------- Table of Contents During the second half ofMarch 2020 , we experienced a significant decline in the volume of samples received. Our monthly reported genomic volumes reached a low point inApril 2020 . Following theApril 2020 low point, sequential monthly total reported genomic volume increased in both May andJune 2020 . As a result of the impact on our volumes, we reported a significant decline in sequential and year-over-year revenue for the quarter endedJune 30, 2020 . For the second half of 2020, our total reported genomic volume, relative to the same period of the prior year, increased 3% as hospitals started performing more non-emergency procedures and physician practices began to reopen. The COVID-19 pandemic has also caused us to modify our business practices, including taking proactive steps to protect our employees and the broader community (including but not limited to curtailing or modifying employee travel, moving to full remote work wherever possible, and cancelling physical participation in meetings, events and conferences), while ensuring our ability to deliver genomic test results to physicians and their patients who need them. Given the significant challenges we face from COVID-19, we have taken actions to reduce expenses and preserve the health of our business, including our board of directors, executive team, including our Chairman and CEO, and certain other employees taking a reduction in pay, which ended inOctober 2020 . InApril 2020 , we also put approximately 60 employees on a temporary furlough, which ended inJuly 2020 . During the second quarter of 2020, with limited physical access to physicians, we expanded our use of digital tools to engage with our customers. Given the effectiveness of these programs, we believe such new sales and marketing models offer an opportunity to increase our efficiency and align with our projections for a U-shaped recovery. To that end, inJuly 2020 we terminated over 30 sales positions, representing a combination of employees who were furloughed and those who were not. At the same time, we brought the remaining 35 employees - mostly in sales - back from furlough as our business began to increase. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. According toJohns Hopkins Coronavirus Resource Center , daily COVID-19 test volume increased from less than approximately 0.2 million tests per day inApril 2020 to between 0.8 million and 1.0 million tests per day in the first half ofOctober 2020 . We believe the rapid increase in daily testing volumes is consuming reagents and supplies otherwise available to genomic testing companies like ours acrossthe United States . InOctober 2020 , we experienced supply chain disruptions in the supply of plastic materials used in the processing of samples. When not limited by the expiration date of products and when we feel it reasonable and feasible to do so, we are taking steps to increase our level of stock reserves, to develop alternative sources of supply and to implement procedures to mitigate the impact on our supply chain or our ability to process samples in our laboratories. Though we are in regular contact with our key suppliers, we do not have, nor expect to have, the necessary insight into our vendors' supply chain issues that we may need to know to effectively mitigate the impact to our business. Though we attempt to mitigate the impact to our business, these interruptions in manufacturing (including the sourcing of reagents or supplies) may negatively impact our test volumes or levels of revenue. The extent of the impact of the COVID-19 on our future liquidity and operational performance will depend on certain developments, including the duration and spread of the outbreak, the impact on our customers' operations and the impact to our sales and renewal cycles.
Fourth Quarter and Full-Year 2020 Financial Results
For the three months ended
•Total Revenue was$34.5 million , an increase of 16%; •Gross Margin was 68%, an increase of 2 percentage points; •Operating Expenses, Excluding Cost of Revenue, were$31.4 million , an increase of 13%; •Net Loss and Comprehensive Loss was$8.0 million , compared to$7.5 million ; •Basic and Diluted Net Loss Per Common Share was$0.14 , versus$0.15 ; •Net Cash Provided by Operating Activities was$2.3 million , compared to$1.8 million ; and •Cash and Cash Equivalents were$349.4 million atDecember 31, 2020 .
For the year ended
•Total Revenue was$117.5 million , a decrease of 2%; •Gross Margin was 65%, a decrease of 5 percentage points; •Operating Expenses, Excluding Cost of Revenue, were$111.4 million , an increase of 13%; •Net Loss and Comprehensive Loss was$34.9 million , compared to$12.6 million ; 68
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•Basic and Diluted Net Loss Per Common Share was
2020 Full-Year and Recent Business Highlights
Commercial Growth
•Grew revenue to$34.5 million in the fourth quarter, an increase of 16% compared to the same period in 2019. •Product revenue grew to$9.8 million for 2020. •Achieved genomic testing and product volume of 13,130 tests in the fourth quarter, a 14% increase compared to the fourth quarter of 2019. •Received new Medicare reimbursement rate of$5,500 for the Envisia Genomic Classifier, which went into effect onOctober 1, 2020 , following the test's designation by theCenters for Medicare & Medicaid Services as an ADLT. •Received reimbursement approval from the German government for the Prosigna® Breast Cancer Gene Signature Assay, making the test accessible for all breast cancer patients inGermany with HR+/HER2- early-stage breast cancer.
•Published ten studies in leading peer-reviewed journals supporting our genomic tests in four disease areas (lung cancer, breast cancer, thyroid cancer and interstitial lung diseases, including idiopathic pulmonary fibrosis). •Launched the PROCURE study, led by an independent scientific committee of breast cancer experts and including input from 180 clinicians throughoutEurope , to help achieve consensus on the evidence supporting the most frequently used breast cancer genomic tests, including Prosigna.
Pipeline Advancement/Collaborations
•Unveiled new preliminary performance data at an R&D Day event for our noninvasive nasal swab test for early lung cancer detection and our Percepta Genomic Atlas for informing treatment decisions at the time of lung cancer diagnosis. •Expanded our strategic collaboration with the Lung Cancer Initiative at Johnson & Johnson to include a focus on the NOBLE trial. The 9,000-patient, prospective, multicenter clinical study is designed to distinguish genomic and other differences in lung cancer development, which may fuelVeracyte's development of future tests. Decipher Acquisition •Announced we have entered into an agreement to acquire Decipher Biosciences, a commercial-stage precision oncology company focused on urologic cancers, further solidifyingVeracyte's global leadership in the genomic cancer diagnostics market while accelerating revenue growth. •Under terms of the acquisition agreement and followingVeracyte's exercise of an option to substitute cash for the entire stock portion of the consideration, the company will pay Decipher security holders$600 million in cash, subject to customary purchase price adjustments. •The acquisition is expected to close on or beforeApril 1, 2021 , subject to regulatory approval and the satisfaction of other customary conditions.
Financing
•Issued and sold 8,547,297 shares of common stock, including 1,114,864 shares sold upon full exercise of the underwriters' option to purchase additional shares, at a price to the public of$74.00 per share. The net proceeds toVeracyte from the offering were approximately$593.8 million . •Veracyte intends to use a portion of the net proceeds from the offering, together with its existing cash and cash equivalents, to finance its acquisition of Decipher and intends to use the remaining net proceeds of the offering for working capital and other general corporate purposes, including to acquire or invest in complementary businesses, technologies or other assets. 69 -------------------------------------------------------------------------------- Table of Contents Factors Affecting Our Performance
Reported Genomic Test Volume
Our performance depends on the number of genomic tests that we perform and report as completed in our CLIA laboratories. Factors impacting the number of tests that we report as completed include, but are not limited to:
•the impact of COVID-19 on patients seeking to have tests performed; •the number of samples that we receive that meet the medical indication for each test performed; •the quantity and quality of the sample received; •receipt of the necessary documentation, such as physician order and patient consent, required to perform, bill and collect for our tests; •the patient's ability to pay or provide necessary insurance coverage for the tests performed; •the time it takes us to perform our tests and report the results; •the seasonality inherent in our business, such as the impact of work days per period, timing of industry conferences and the timing of when patient deductibles are exceeded, which also impacts the reimbursement we receive from insurers; and •our ability to obtain prior authorization or meet other requirements instituted by payers, benefit managers, or regulators necessary to be paid for our tests. We generate substantially all our revenue from genomic testing services, including the rendering of a cytopathology diagnosis as part of the Afirma solution. For the Afirma classifier, we do not accrue revenue for approximately 5% - 10% of the tests that we perform and report as complete due principally to insufficient RNA from which to render a result and tests performed for which we do not reasonably expect to be paid.
Continued Adoption of and Reimbursement for our Products
Revenue growth depends on our ability to secure coverage decisions, achieve broader reimbursement at increased levels from third-party payers, expand our base of prescribing physicians and increase our penetration in existing accounts. Because some payers consider our products experimental and investigational, we may not receive payment for tests and payments we receive may not be at acceptable levels. We expect our revenue growth to increase if more payers make a positive coverage decision and as payers enter into contracts with us, which should enhance our revenue and cash collections. To drive increased adoption of our products, we increased our sales force and marketing efforts over the last several years. Our sales teams are aligned under our general manager-based structure to focus on specific products and global markets. If we are unable to expand the base of prescribing physicians and penetration within these accounts at an acceptable rate, or if we are not able to execute our strategy for increasing reimbursement, we may not be able to effectively increase our revenue. We expect to continue to see pressure from payers to limit the utilization of tests, generally, and we believe more payers are deploying cost containment tactics, such as pre-authorization, reduction of the payer portion of reimbursement and employing laboratory benefit managers to reduce utilization rates.
Integrating acquired assets and advances to our collaborations
Revenue growth, operational results and advances to our business strategy depends on our ability to integrate the assets acquired into our existing business. The integration of acquired assets may impact our revenue growth, increase the cost of operations, cause significant write-offs of intangible assets, or may require management resources that otherwise would be available for ongoing development of our existing business. The integration of assets acquired from NanoString inDecember 2019 may impact our revenue and operating results through integration of a sales force, development of a product supply operation and the expansion of our business internationally with a broad menu of advanced genomic tests that may be offered. Revenue growth or reimbursement from our collaborations depends on our ability to deliver services or information and achieve milestones required from our collaborative partners. Our collaboration partners pay us for the provision of data, other services and the achievement of milestones. Under a collaboration with Johnson & Johnson in 2018, we provided data services required under this agreement for$7.0 million in 2019, however, there remains$9.0 million of revenue associated with development and commercialization milestones yet to be achieved. 70 --------------------------------------------------------------------------------
Table of Contents How We Recognize Revenue Testing Revenue We recognize testing revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers. Most of our revenue is generated from the provision of diagnostic testing services. These services are completed upon the delivery of test results to the prescribing physician, at which time we bill for the services. We recognize revenue related to billings on an accrual basis based on estimates of the amount that will ultimately be realized. In determining the amount to accrue for a delivered test, we consider factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and us, payment as a percentage of the 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. Generally, cash we receive is collected within 12 months of the date the test is billed. We cannot provide any assurance as to when, if ever, or to what extent any of these amounts will be collected. Notwithstanding our efforts to obtain payment for these tests, payers may deny our claims, in whole or in part, and we may never receive payment for these tests. We bill list price regardless of contract rate, but only recognize revenue from amounts that we estimate are collectible and meet our revenue recognition criteria. Revenue may not be equal to the billed amount due to a number of factors that we consider when determining revenue accrual rates, including differences in reimbursement rates, the amounts of patient co-payments and co-insurance, the existence of secondary payers, claims denials and the amount we expect to ultimately collect. Finally, when we increase our list price, it will increase the cumulative amounts billed but may not positively impact accrued revenue. In addition, payer contracts generally include the right of offset and payers may offset payments prior to resolving disputes over tests performed. Generally, we calculate the average reimbursement from our products from all payers, for tests that are on average a year old, since it can take a significant period of time to collect from some payers. Except in situations where we believe the rate we reasonably expect to collect to vary due to a coverage decision, contract, more recent reimbursement data or evidence to the contrary, we use an average of reimbursement for tests provided over four quarters as it reduces the effects of temporary volatility and seasonal effects. Thus, the average reimbursement per product represents the total cash collected to date against genomic classifier tests, including variants, performed during the relevant period divided by the number of these tests performed during that same period. The average genomic classifier reimbursement rate will change over time due to a number of factors, including medical coverage decisions by payers, the effects of contracts signed with payers, changes in allowed amounts by payers, our ability to successfully win appeals for payment, and our ability to collect cash payments from third-party payers and individual patients. Historical average reimbursement is not necessarily indicative of future average reimbursement. For the year endedDecember 31, 2020 , we accrued, on average, between$2,800 and$2,900 for the Afirma genomic classifier tests, including variants, that met our revenue recognition standard, which was between 90% - 95% of the reported Afirma classifier test volume.
From the fourth quarter of 2019 to the fourth quarter of 2020, we accrued
between
We incur expense for tests in the period in which the test is conducted and recognize revenue for tests in the period in which our revenue recognition criteria are met.
Product Revenue
We began recognizing product revenue inDecember 2019 in accordance with the provisions of ASC 606, Revenue from Contracts with Customers, when we executed an agreement with NanoString for the exclusive worldwide license to the nCounter Analysis System for in vitro diagnostic use. We recognize product revenue when control of the promised goods is transferred to our customers, in an amount that reflects the consideration expected to be received in exchange for those products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract 71 -------------------------------------------------------------------------------- Table of Contents 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 we have transferred control of a product to the customer, meaning the customer has the ability to use and obtain the benefit of the product. We recognize 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 charged to our customers and included in product revenue. Our products consist of the Prosigna breast cancer assay, the nCounter Analysis System and related diagnostic kits. Revenues are presented net of the taxes that are collected from customers and remitted to governmental authorities.
Biopharmaceutical and Collaboration Revenues
From time to time, we enter into arrangements to license or provide access to our assets or services, including testing services, clinical and medical services, research and development and other services. Such arrangements may require us to deliver various rights, data, services, access and/or testing services to partner biopharmaceutical companies. The underlying terms of these arrangements generally provide for consideration paid to us in the form of nonrefundable fees, performance milestone payments, expense reimbursements and possibly royalty and/or other payments. Net sales of data or other services to our 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 our 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 our best estimate of what the selling price would be if the deliverable was regularly sold by us 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, we utilize 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.
Development of Additional Tests
We continue to advance our portfolio of diagnostic tests that leverage innovations in genomic science, sequencing technology and machine learning, and our exclusive diagnostics rights to the nCounter Analysis System to further improve patient care globally.
Our Afirma GSC and Xpression Atlas, or XA, provide physicians with a comprehensive solution for thyroid nodule diagnosis. InMay 2017 , we introduced the Afirma GSC, supported by rigorous clinical validation data showing that the RNA sequencing-based test can help significantly more patients avoid unnecessary surgery in thyroid cancer diagnosis, compared to the original Afirma classifier. The Afirma GSC was developed with RNA whole-transcriptome sequencing and machine learning and helps identify patients with benign thyroid nodules among those with indeterminate cytopathology. For those with suspected thyroid cancer, the Afirma Xpression Atlas provides physicians with genomic alteration content from the same fine needle aspiration samples that are used in Afirma GSC testing and may help physicians decide with greater confidence on the surgical or therapeutic pathway for their patients. We launched the original Afirma XA inMarch 2018 . We subsequently introduced an expanded Afirma XA inApril 2020 to provide physicians with additional gene alteration content - including novel or rare NTRK, ALK, RET and BRAF fusions - to further inform surgery and treatment decisions for patients with suspected or confirmed thyroid cancer. Compared to the 72
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Table of Contents original gene alteration panel, the expanded Afirma XA now reports 905 DNA variants (versus 761) and 235 RNA fusion partners (versus 130) in 593 genes (versus 511).
Our Afirma GSC, including the BRAF v600E mutation test and medullary thyroid cancer, or MTC, Classifier, along with the Afirma XA offer a comprehensive solution for physicians evaluating thyroid nodules. Our broad ability to serve the thyroid diagnostic market also enables us to enter into research collaborations with biopharmaceutical companies, which is intended to support their development of targeted therapies for genetically defined cancers, including thyroid cancer. In pulmonology, our Percepta Genomic Sequencing Classifer, or GSC, improves lung cancer diagnosis following an inconclusive bronchoscopy by identifying patients with lung nodules who are at low risk of cancer and may avoid further, invasive procedures and those with a high risk of lung 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 person's airway - without the need to sample the often hard-to-reach nodule directly. We commercially introduced the Percepta classifier in 2015, with clinical validation data subsequently published in theNew England Journal of Medicine . InJune 2019 , we launched the next-generation Percepta test, providing expanded lung cancer risk information to further inform treatment decisions. The Percepta classifier is the first product of its kind to be available commercially and the first to obtain Medicare coverage for improved lung cancer diagnosis. We are currently leveraging the same "field of injury" technology that powers our Percepta classifier to develop a first-of-its-kind, noninvasive nasal swab test that can enable earlier lung cancer diagnosis and ultimately, we believe, help reduce lung cancer deaths. InDecember 2020 , we announced preliminary, cross-validation performance data for our nasal swab classifier showing that the novel genomic test could identify with a high degree of accuracy patients whose lung nodules were high risk for cancer, so they could obtain prompt diagnosis and potential treatment, and patients with low risk of cancer so they could be monitored noninvasively. We are also developing the Percepta Atlas, which - similar to the Afirma XA - is intended to inform treatment decisions by detecting gene alterations in small samples collected at the time of diagnosis. We plan to introduce the nasal swab test and the Percepta Atlas commercially inthe United States during the second half of 2021, rounding out our comprehensive lung cancer portfolio designed to answer important clinical questions throughout the patient journey. We plan to complete the development of the nasal swab test on the nCounter instrument for regulatory submission internationally by the end of 2022. Additionally, our Envisia Genomic Classifier, launched inOctober 2016 , is the first commercial test to improve the diagnosis of IPF among patients with a suspected interstitial lung disease. The Envisia test is also covered for Medicare patients. We are adapting our Envisia classifier for use on the nCounter system so that the test may be offered to physicians and patients in international markets by hospitals and laboratories that will perform the test locally. We expect to introduce the test before the end of 2021. Further, our LymphMark test is in development for use on the nCounter platform as an aid in disease characterization and prognosis to support disease management for patients newly diagnosed with diffuse large B-cell lymphoma, or DLBCL. The LymphMark test utilizes gene-expression profiling of RNA extracted from formalin-fixed paraffin-embedded tissue to classify the "cell of origin" subtype of DLBCL tumors.
Timing of Our Research and Development Expenses
We deploy state-of-the-art and costly genomic technologies in our biomarker
discovery experiments, and our spending on these technologies may vary
substantially from quarter to quarter. We also spend a significant amount to
secure clinical samples that can be used in discovery and product development as
well as clinical validation studies. The timing of these research and
development activities is difficult to predict, as is the timing of sample
acquisitions. If a substantial number of clinical samples are acquired in a
given quarter or if a high-cost experiment is conducted in one quarter versus
the next, the timing of these expenses can affect our financial results. We
conduct clinical studies to validate our new products as well as on-going
clinical studies to further the published evidence to support our commercialized
tests. As these studies are initiated, start-up costs for each site can be
significant and concentrated in a specific quarter. Spending on research and
development, for both experiments and studies, may vary significantly by quarter
depending on the timing of these various expenses.
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--------------------------------------------------------------------------------Table of Contents Financial Overview Testing Revenue ThroughDecember 31, 2020 , we derived a substantial majority of our revenue from the sale of Afirma delivered primarily to physicians inthe United States . We generally invoice third-party payers upon delivery of a patient report to the prescribing physician. As such, we take the assignment of benefits and the risk of cash collection from the third-party payer and individual patients. 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: Year Ended December 31, 2020 2019 2018 Medicare 24 % 26 % 29 % UnitedHealthcare 11 % 11 % 12 % 35 % 37 % 41 % For tests performed, we recognize the related revenue upon delivery of a patient report to the prescribing physician based on the amount that we expect to ultimately receive. In determining the amount to accrue for a delivered test, we consider factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and us, payment as a percentage of agreed upon reimbursement rate (if applicable), amount paid per test and any current development or changes that could impact reimbursement. Upon ultimate collection, the amount received is compared to previous estimates and the amount accrued is adjusted accordingly. Our ability to increase our revenue will depend on our ability to penetrate the market, obtain positive coverage policies from additional third-party payers, obtain reimbursement and/or enter into contracts with additional third-party payers for our current and new tests, and increase reimbursement rates for tests performed. Finally, should the judgments underlying our estimated reimbursement change, our accrued revenue and financial results could be negatively impacted in future periods.
Cost of Testing Revenue
The components of our cost of revenue are laboratory expenses, kit costs, 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 recorded as the test is processed regardless of whether and when revenue is recognized with respect to that test. As a result, our cost of revenue as a percentage of revenue may vary significantly from period to period because we may not recognize all revenue in the period in which the associated costs are incurred. We expect cost of revenue in absolute dollars to increase as the number of tests we perform increases. However, we expect that the cost per test will decrease over time due to leveraging fixed costs, efficiencies we may gain as test volume increases and from automation, process efficiencies and other cost reductions. As we introduce new tests, initially our cost of revenue will be high as we expect to run suboptimal batch sizes, run quality control batches, test batches, registry samples and generally incur costs that may suppress or reduce gross margins. This will disproportionately increase our aggregate cost of revenue until we achieve efficiencies in processing these new tests.
Cost of Product Revenue
Our cost of product revenue consists primarily of costs of purchasing instruments and diagnostic kits from third-party contract manufacturers, installation, warranty, service and packaging and delivery costs. In addition, cost of product includes royalty costs for licensed technologies included in our products and labor expenses. As our Prosigna test kits are sold in various configurations with different number of tests, our product cost per test will vary based on the specific kit configuration purchased by customers.
Cost of Biopharmaceutical Revenue
Our cost of biopharmaceutical revenue are the costs of performing activities
under arrangements that require us to perform research and development services
on behalf of a customer pursuant to a biopharmaceutical service agreement, and
is mainly comprised of compensation expense and pass through costs.
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Research and Development
Research and development expenses include expenses incurred to develop our
technology, collect clinical samples and conduct clinical studies to develop and
support our products and pipeline. These expenses consist of compensation
expenses, direct research and development expenses such as prototype materials,
laboratory supplies and costs associated with setting up and conducting clinical
studies at domestic and international sites, professional fees, depreciation and
amortization, other miscellaneous expenses and allocation of facility and
information technology expenses. We expense all research and development costs
in the periods in which they are incurred. We expect to incur significant
research and development expenses as we continue to invest in research and
development activities related to developing additional products and evaluating
various platforms. We incurred research and development expenses on ongoing
evidence development for our Afirma, Percepta and Envisia classifiers in 2019.
We incurred a majority of our research and development expenses in year ended
December 31, 2020 in support of our pipeline products, and expect this to
continue in 2021 and beyond.
Selling and Marketing
Selling and marketing expenses consist of compensation expenses, direct marketing expenses, professional fees, other expenses such as travel and communications costs and allocation of facility and information technology expenses. We have expanded our internal sales force as we invest in our multi-product sales strategy to assign a single point of contact to successfully develop and implement relationships with our customers and increased our marketing spending. We have also incurred increased selling and marketing expense as a result of investments in our lung product portfolio and believe total selling and marketing expenses will continue to increase as we launch and promote our new tests. General and Administrative General and administrative expenses include compensation expenses for executive officers and administrative, billing and client service personnel, professional fees for legal and audit services, occupancy costs, depreciation and amortization, and other expenses such as information technology and miscellaneous expenses offset by allocation of facility and information technology expenses to other functions. For the year endedDecember 31, 2020 , approximately 62% of the average headcount classified as general and administrative encompass our billing and customer care teams. We expect general and administrative expenses to continue to increase as we build our general and administration infrastructure and to stabilize thereafter.
Intangible Asset Amortization
Our finite-lived intangible assets, acquired in business combinations, are being amortized over 5 to15 years, using the straight-line method. Amortization expense is expected to be approximately$5.1 million per year through 2024 and decrease thereafter. Interest Expense
Interest expense is attributable to our borrowings under debt agreements and capital leases as well as costs associated with the prepayment of debt.
Other Income, Net
Other income, net consists primarily of sublease rental income and interest income from our cash held in interest bearing accounts.
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Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our audited consolidated financial statements, which
have been prepared in accordance with United States generally accepted
accounting principles, or U.S. GAAP. The preparation of the consolidated
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
liabilities at the date of the consolidated financial statements, as well as the
reported revenue generated and expenses incurred during the reporting periods.
Our estimates are based on our historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions and any
such differences may be material. We believe that the accounting policies
discussed below are critical to understanding our historical and future
performance, as these policies relate to the more significant areas involving
management's judgments and estimates.
Testing Revenue
We recognize revenue related to billings on an accrual basis based on estimates of the amount that will ultimately be realized. In determining the amount to accrue for a delivered test, we consider factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and us, 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. Generally, we determine accrual rates based on the average reimbursement from payers for tests that are on average a year old, since it can take a significant period of time to collect from some payers. Except in situations where we believe the rate we reasonably expect to collect to vary due to a coverage decision, contract, more recent reimbursement data or evidence to the contrary, we use an average of reimbursement for tests provided over four quarters as it reduces the effects of temporary volatility and seasonal effects.
We use judgment in determining accrual rates and our judgments will continue to evolve in the future as we continue to gain reimbursement experience.
Biopharmaceutical and Collaboration Revenue
From time to time, we enter into arrangements for the research and development and/or commercialization of services. Such arrangements may require us to deliver various rights, services and/or samples, including intellectual property rights/licenses, research and development services, and/or commercialization of services. The underlying terms of these arrangements generally provide for consideration to us in the form of nonrefundable upfront license fees, development and commercial performance milestone payments, expense reimbursement, royalty payments and/or profit sharing. Net sales of data or other services to our 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, 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 our 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 our best estimate of what the selling price would be if the deliverable was regularly sold by us 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 or services is transferred. 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, we utilize 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.
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Other Significant Accounting Policies
Acquisitions
We first determine whether a set of assets acquired and liabilities assumed constitute a business and should be accounted for as a business combination. If the assets acquired are not a business, we account for the transaction as an asset acquisition. Business combinations are accounted for by using the acquisition method of accounting. Under the acquisition method, assets acquired, and liabilities assumed are recorded at their respective fair values as of the acquisition date in our consolidated financial statements. The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill. Contingent consideration obligations incurred in connection with a business combination are recorded at fair value on the acquisition date and remeasured at each subsequent reporting period until the related contingencies are resolved, with the resulting changes in fair value recorded in earnings. 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 our estimated borrowing rate.
Finite-lived Intangible Assets
Finite-lived intangible assets consist of intangible assets acquired as part of business combinations. We amortize finite-lived intangible assets using the straight-line method over their estimated useful lives of 5 to 15 years, based on management's estimate of the period over which their economic benefits will be realized, product life and patent life. We test these finite-lived intangible assets for impairment when events or circumstances indicate a reduction in the fair value below their carrying amounts. There was no impairment recognized during the years endedDecember 31, 2020 , 2019, or 2018.
Goodwill is reviewed for impairment on an annual basis or more frequently if events or circumstances indicate that it may be impaired. Our goodwill evaluation is based on both qualitative and quantitative assessments regarding the fair value of goodwill relative to its carrying value. We have determined that we operate in a single segment and have a single reporting unit associated with the development and commercialization of diagnostic products. In the event we determine that it is more likely than not the carrying value of the reporting unit is higher than its fair value, quantitative testing is performed comparing recorded values to estimated fair values. If impairment is present, the impairment loss is measured as the excess of the recorded goodwill over its implied fair value. We perform our annual evaluation of goodwill during the fourth quarter of each fiscal year. There was no impairment recognized during the years endedDecember 31, 2020 , 2019, or 2018.
Stock-based Compensation
We recognize stock-based compensation expense for only those shares underlying
stock options and restricted stock units that we expect to vest on a
straight-line basis over the requisite service period of the award. We estimate
the fair value of stock options using a Black-Scholes option-pricing model,
which requires the input of highly subjective assumptions, including the
option's expected term and stock price volatility. In addition, judgment is also
required in estimating the number of stock-based awards that are expected to be
forfeited. Forfeitures are estimated based on historical experience at the time
of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. The assumptions used in calculating the fair value
of share-based payment awards represent management's best estimates, but these
estimates involve inherent uncertainties and the application of management's
judgment. As a result, if factors change and we use different assumptions, our
stock-based compensation expense could be materially different in the future.
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Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019 (in thousands, except
percentages)
Year Ended December 31,
2020 Change % 2019
Revenue:
Testing revenue $ 101,970 $ (5,385) (5) % $ 107,355
Product revenue 9,845 8,922 967 % 923
Biopharmaceutical revenue 5,668 (2,422) (30) % 8,090
Collaboration revenue - (4,000) (100) % 4,000
Total revenue 117,483 (2,885) (2) % 120,368
Operating expense:
Cost of testing revenue 35,913 (164) - % 36,077
Cost of product revenue 4,921 4,475 1,003 % 446
Cost of biopharmaceutical revenue 621 621 NM -
Research and development 17,204 2,353 16 % 14,851
Selling and marketing 52,389 (1,302) (2) % 53,691
General and administrative 36,729 7,700 27 % 29,029
Intangible asset amortization 5,095 3,694 264 % 1,401
Total operating expenses 152,872 17,377 13 % 135,495
Loss from operations (35,389) (20,262) (134) % (15,127)
Interest expense (229) 448 (66) % (677)
Other income, net 709 (2,496) (78) % 3,205
Net loss and comprehensive loss $ (34,909) $ (22,310) (177) % $ (12,599)
Other Operating Data:
Genomic classifiers reported 37,401 (2,211) (6) % 39,612
Product tests sold 7,088 6,408 942 % 680
Total test volume 44,489 4,197 10 % 40,292
Depreciation and amortization expense
Revenue During the second half ofMarch 2020 , we began to experience a significant decline in the volume of samples received due to COVID-19, resulting in a significant decline in revenue. Revenue decreased$2.9 million , or 2%, for the year endedDecember 31, 2020 compared to 2019. This was primarily due to a$5.4 million decrease in testing revenue from a 6% decrease in our Afirma, Percepta, and Envisia genomic classifiers reported, and a$4.0 million decrease in collaboration revenue, partially offset by an$8.9 million increase in product revenue from sales of Prosigna. Product sales began inDecember 2019 , when we acquired the rights to Prosigna from NanoString. We also make adjustments, as necessary, for testing revenue accrued in prior periods as collections are made if the amount we expect to collect changes. The adjustment for testing revenue accrued in prior periods was$1.5 million and$1.6 million for the years endedDecember 31, 2020 and 2019, respectively, a net decrease of$0.1 million between the years. Biopharmaceutical revenue decreased$2.4 million , primarily due to$7.0 million for the provision of data for the year endedDecember 31, 2019 whereas biopharmaceutical revenue primarily consisted of$1.5 million for the provision of data,$1.0 million for the sale of commercial and development rights to CareDx,$1.0 million of milestones and$1.8 million for development services for the year endedDecember 31, 2020 . Collaboration revenue in the year endedDecember 31, 2019 was derived from the fulfillment of development milestones. 78
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Comparison of revenue for the years endedDecember 31, 2019 and 2018 is included in Item 8 of Part II of the Annual Report on Form 10-K filed with theSecurities and Exchange Commission datedFebruary 25, 2020 . There was no product revenue or collaboration revenue in 2018.
Cost of revenue
Comparison of the years ended
Year Ended December 31,
2020 Change % 2019
Cost of testing revenue:
Laboratory expense $ 19,287 $ (879) (4) % $ 20,166
Sample collection expense 4,241 (560) (12) % 4,801
Compensation expense 7,130 1,117 19 % 6,013
License fees and royalties 52 42 420 % 10
Depreciation and amortization 1,055 35 3 % 1,020
Other expenses 1,621 (128) (7) % 1,749
Allocations 2,527 209 9 % 2,318
Total $ 35,913 $ (164) - % $ 36,077
Cost of product revenue:
Product costs $ 4,032 $ 3,586 804 % $ 446
License fees and royalties 870 870 NM -
Depreciation and amortization 19 19 NM -
Total $ 4,921 $ 4,475 1,003 % $ 446
Cost of biopharmaceutical revenue:
Compensation expense $ 150 $ 150 NM $ -
Other expenses 471 471 NM -
Total $ 621 $ 621 NM $ -
Cost of testing revenue decreased $0.2 million for the year ended December 31,
2020 compared to 2019. The decrease in laboratory costs was primarily related to
a 6% decrease in the volume of genomic classifiers reported partially offset by
a $1.1 million write-down of supplies for the expiration of reagents due to a
decline in volumes resulting from the COVID-19 pandemic. The decrease in sample
collection costs primarily related to the 6% decrease in the volume of genomic
classifiers reported. The increase in compensation expense primarily relates to
an average laboratory headcount increase of 8%.
Cost of product revenue is related to sales of Prosigna, which commenced in
Cost of biopharmaceutical revenue includes labor costs incurred by our employees working on biopharmaceutical customer projects and pass-through expenses incurred on these projects. Biopharmaceutical revenue recognized in 2019 was mainly for the sale of sequencing data and had no related costs. Comparison of cost of testing revenue for the years endedDecember 31, 2019 and 2018 are included in Item 8 of Part II of the Annual Report on Form 10-K filed with theSecurities and Exchange Commission datedFebruary 25, 2020 . There was no cost of product or biopharmaceutical revenue in 2018. 79 -------------------------------------------------------------------------------- Table of Contents Research and development
Comparison of the years ended
Year Ended December 31,
2020 Change % 2019
Research and development expense Compensation expense$ 11,658 $ 2,214 23 %$ 9,444 Direct research and development expense 2,984 60 2 % 2,924 Professional fees 763 215 39 % 548 Depreciation and amortization 242 (45) (16) % 287 Other expenses 225 (218) (49) % 443 Allocations 1,332 127 11 % 1,205 Total$ 17,204 $ 2,353 16 %$ 14,851 Research and development expense increased$2.4 million or 16% for the year endedDecember 31, 2020 compared to 2019. Compensation expense increased$2.2 million , primarily due to a 13% increase in average headcount and higher stock-based compensation expense from the increase in our stock price over the last two years. Comparison of research and development expense for the years endedDecember 31, 2019 and 2018 are included in Item 8 of Part II of the Annual Report on Form 10-K filed with theSecurities and Exchange Commission datedFebruary 25, 2020 .
Selling and marketing
Comparison of the years ended
Year Ended December 31,
2020 Change % 2019
Selling and marketing expense: Compensation expense$ 39,111 $ 5,872 18 %$ 33,239 Direct marketing expense 3,722 (2,293) (38) % 6,015 Professional fees 1,459 (775) (35) % 2,234 Other expenses 4,381 (4,627) (51) % 9,008 Allocations 3,716 521 16 % 3,195 Total$ 52,389 $ (1,302) (2) %$ 53,691 Selling and marketing expense decreased$1.3 million , or 2%, for the year endedDecember 31, 2020 compared to 2019. The increase in compensation expense was due to a 24% increase in average headcount, higher incentive compensation and higher stock-based compensation expense partially offset by the temporary furloughing of employees beginning inApril 2020 . The decrease in direct marketing expense was due to lower general marketing expenditures. The decrease in other expenses was primarily due to decreased travel and entertainment expenses as a result of COVID-19 travel restrictions. Comparison of selling and marketing expense for the years endedDecember 31, 2019 and 2018 are included in Item 8 of Part II of the Annual Report on Form 10-K filed with theSecurities and Exchange Commission datedFebruary 25, 2020 . 80 -------------------------------------------------------------------------------- Table of Contents General and administrative
Comparison of the years ended
Year Ended December 31,
2020 Change % 2019
General and administrative expense: Compensation expense$ 22,875 $ 4,338 23 %$ 18,537 Professional fees 10,342 1,488 17 % 8,854 Occupancy costs 2,671 153 6 % 2,518 Depreciation and amortization 1,533 125 9 % 1,408 Other expenses 6,883 2,453 55 % 4,430 Allocations (7,575) (857) 13 % (6,718) Total$ 36,729 $ 7,700 27 %$ 29,029 General and administrative expense increased$7.7 million , or 27%, for the year endedDecember 31, 2020 compared to 2019. The increase in compensation expense was primarily due to higher stock-based compensation expense from the increase in our stock price and a 4% increase in average headcount. The increase in professional fees was primarily consulting, accounting and legal-related. The increase in other expenses was primarily due to a$1.5 million revaluation of the contingent consideration for the NanoString transaction and a$1.0 million impairment loss on the equity investment in MAVIDx. General and administrative expenses related to occupancy costs and information technology costs are allocated monthly to general and administrative expense, selling and marketing expense, research and development expense, and cost of testing revenue based on the headcount and employee location.
Comparison of general and administrative expense for the years ended
Interest expense
Interest expense decreased$0.4 million , or 66%, for the year endedDecember 31, 2020 compared to 2019, primarily due to the prepayment of$24.9 million of the principal amount of our Term Loan Advance 2019. The average Term Loan Advance interest rate was 5.4% and 6.7% for the years endedDecember 31, 2020 and 2019, respectively. Comparison of interest expense for the years endedDecember 31, 2019 and 2018 are included in Item 8 of Part II of the Annual Report on Form 10-K filed with theSecurities and Exchange Commission datedFebruary 25, 2020 .
Other income, net
Other income, net, decreased$2.5 million for the year endedDecember 31, 2020 compared to 2019, primarily due to lower dividend and interest income from our investments and cash and cash equivalents. Comparison of Other income, net, for the years endedDecember 31, 2019 and 2018 are included in Item 8 of Part II of the Annual Report on Form 10-K filed with theSecurities and Exchange Commission datedFebruary 25, 2020 .
Liquidity and Capital Resources
From inception throughDecember 31, 2020 , we have been financed primarily through net proceeds from the sale of our equity securities. We have incurred net losses since our inception. For the years endedDecember 31, 2020 , 2019 and 2018, we had net losses of$34.9 million ,$12.6 million and$23.0 million , respectively, and we expect to incur additional losses in 2021 and potentially in future years. As ofDecember 31, 2020 , we had an accumulated deficit of$281.6 million . 81 -------------------------------------------------------------------------------- Table of Contents InFebruary 2021 , we entered into an agreement to acquire Decipher for$600 million in cash which is expected to close byApril 2021 . OnFebruary 9, 2021 , we issued and sold 8,547,297 shares of common stock in a registered public offering for net proceeds of$593.8 million . We believe our existing cash and cash equivalents of$349.4 million as ofDecember 31, 2020 , ourFebruary 2021 equity offering proceeds, our available revolving line of credit, and our revenue during the next 12 months will be sufficient to meet our anticipated cash requirements for at least the next 12 months. We expect that our near- and longer-term liquidity requirements will continue to consist of costs to run our laboratories, research and development expenses, selling and marketing expenses, general and administrative expenses, working capital, costs to service our Loan and Security Agreement (See Note 8 to our audited consolidated financial statements included in this Annual Report on Form 10-K for more information about our Loan and Security Agreement), capital expenditures and general corporate expenses associated with the growth of our business. However, we may also use cash to acquire or invest in complementary businesses, technologies, services or products that would change our cash requirements. If we are not able to generate revenue to finance our cash requirements, including due to the impacts of the COVID-19 pandemic, we will need to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations or licensing arrangements. If we raise funds by issuing equity securities, dilution to stockholders could result. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings could impose significant restrictions on our operations. The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights, restrictions on our cash pursuant to the terms of our Loan and Security Agreement and other operating restrictions that could adversely affect our ability to conduct our business. Our Loan and Security Agreement imposes restrictions on our operations, increases our fixed payment obligations and has restrictive covenants. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms. These agreements may require that we relinquish or license to a third-party on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves, or reserve certain opportunities for future potential arrangements when we might be able to achieve more favorable terms. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives, or forgo potential acquisitions or investments. In addition, we may have to work with a partner on one or more of our products or development programs, which could lower the economic value of those programs to us.
Public Offering of Common Stock
OnFebruary 9, 2021 , we 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. Our net proceeds from the offering were$593.8 million , after deducting underwriting commissions and offering expenses of$38.7 million . InAugust 2020 , we issued and sold 6,900,000 shares of common stock in a registered public offering, including 900,000 shares issued and sold upon the underwriters' exercise in full of their option to purchase additional shares, at a price to the public of$30.00 per share. Our net proceeds from the offering were approximately$193.8 million , after deducting underwriting discounts and commissions and offering expenses of$13.2 million . InMay 2019 , we issued and sold 6,325,000 shares of common stock in a registered public offering, including 825,000 shares issued and sold upon the underwriters' exercise in full of their option to purchase additional shares, at a price to the public of$23.25 per share. Our net proceeds from the offering were approximately$137.8 million , after deducting underwriting discounts and commissions and offering expenses of$9.2 million . InJuly 2018 , we issued and sold 5,750,000 shares of common stock in a registered public offering, including 750,000 shares issued and sold upon the underwriters' exercise in full of their option to purchase additional shares, at a price to the public of$10.25 per share. Our net proceeds from the offering were approximately$55.0 million , after deducting underwriting discounts and commissions and estimated offering expenses of$3.9 million . 82 -------------------------------------------------------------------------------- Table of Contents Loan and Security Agreement OnNovember 3, 2017 , we entered into the Loan and Security Agreement withSilicon Valley Bank . The Loan and Security Agreement allows us to borrow up to$35.0 million , with a$25.0 million term loan, or Term Loan, and a revolving line of credit of up to$10.0 million , or the Revolving Line of Credit, subject to, with respect to the Revolving Line of Credit, a borrowing base of 85% of eligible accounts receivable. The Term Loan was advanced upon the closing of the Loan and Security Agreement. Borrowings under the Loan and Security Agreement mature inOctober 2022 . The Term Loan bears interest at a variable rate equal to (i) the thirty-dayU.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. We are also required to pay an annual facility fee on the Revolving Line of Credit of$25,000 . The average Term Loan Advance interest rate for the year endedDecember 31, 2020 was 5.4%. We may prepay the outstanding principal amount under the Term Loan plus accrued and unpaid interest and, if the Term Loan is repaid in full, a prepayment premium of$250,000 . In addition, a final payment on the Term Loan in the amount of$1.2 million is due upon the earlier of the maturity date of the Term Loan or its payment in full. InJanuary 2019 ,May 2019 andAugust 2020 , we prepaid$12.5 million ,$12.4 million and$0.1 million of the principal amount of the Term Loan Advance, respectively, and did not incur any prepayment premium as we did not repay the Term Loan Advance in full. As ofDecember 31, 2020 , the principal balance outstanding wasone dollar . The Loan and Security Agreement contains customary representations, warranties, and events of default, as well as affirmative and negative covenants. As ofDecember 31, 2020 , we were in compliance with debt covenants. Our obligations under the Loan and Security Agreement are secured by substantially all of our assets (excluding intellectual property), subject to certain customary exceptions.
Cash Flows
The following table summarizes our cash flows for the years ended
Years Ended December 31,
2020 2019 2018
Net cash used in operating activities$ (9,711) $ (3,232) $ (13,521) Net cash used in investing activities (3,837) (42,733) (1,874) Net cash provided by financing activities 203,595 127,287 59,499
Cash Flows from Operating Activities
Cash used in operating activities for the year endedDecember 31, 2020 was$9.7 million . The net loss of$34.9 million includes non-cash charges of$13.0 million of stock-based compensation expense,$7.9 million of depreciation and amortization, which includes$5.1 million of intangible asset amortization, a$1.1 million write-down of supplies, noncash lease expense of$1.0 million , impairment loss of$1.0 million and a$1.5 million expense for the revaluation of the contingent consideration related to the NanoString transaction. Cash used as a result of changes in operating assets and liabilities was$0.5 million , primarily comprised of a decrease in accrued liabilities of$0.9 million , a decrease in operating lease liability of$1.4 million , and an increase in prepaid expense and other current assets of$1.0 million , partially offset by a decrease in accounts receivable of$1.0 million , and an increase in accounts payable of$0.7 million and a decrease in supplies of$1.1 million . Cash used in operating activities for the year endedDecember 31, 2019 was$3.2 million . The net loss of$12.6 million includes non-cash charges of$9.8 million of stock-based compensation expense and$4.1 million of depreciation and amortization, which includes$1.4 million of intangible asset amortization, noncash lease expense of$1.0 million , and$0.2 million of end-of-term debt obligation accruals. Cash used as a result of changes in operating assets and liabilities was$5.9 million , primarily comprised of an increase in accounts receivable of$6.2 million , an increase in supplies of$3.4 million , a decrease in operating lease liability of$1.2 million and an increase in other assets of$0.4 million , partially offset by an increase in accrued liabilities and deferred rent of$5.2 million . 83
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Cash used in operating activities for the year endedDecember 31, 2018 was$13.5 million . The net loss of$23.0 million includes non-cash charges of$6.0 million of stock-based compensation expense and$3.9 million of depreciation and amortization, which includes$1.1 million of intangible asset amortization. It also includes$0.3 million of end-of-term debt obligation accruals. Cash used as a result of changes in operating assets and liabilities of$0.7 million was primarily due to a decrease in accounts payable of$1.6 million , an increase in other assets of$0.8 million and increases in prepaid expenses and other current assets and accounts receivable of$0.9 million , partially offset by a decrease in supplies of$1.9 million and an increase in accrued liabilities and deferred rent of$0.7 million .
Cash Flows from Investing Activities
Cash used in investing activities for the year endedDecember 31, 2020 was$2.8 million for the acquisition of property and equipment and$1.0 million for the purchase of equity securities ofMAVIDx, Inc. Cash used in investing activities for the year endedDecember 31, 2019 was$42.7 million , consisting of$40.0 million for the acquisition of NanoString Technologies, Inc.'s diagnostics business, and$2.7 million for the acquisition of property and equipment, net of proceeds from the disposal of property and equipment.
Cash used in investing activities for the year ended
Cash Flows from Financing Activities
Cash provided by financing activities for the year endedDecember 31, 2020 was$203.6 million , consisting of$193.8 million in net proceeds from the issuance of common stock in a public offering inAugust 2020 ,$13.7 million in proceeds from the exercise of options to purchase our common stock and purchase of stock under our Employee Stock Purchase Plan, or ESPP, partially offset by$3.8 million in tax payments during the period related to the vesting of restricted stock units granted to employees. Cash provided by financing activities for the year endedDecember 31, 2019 was$127.3 million , consisting of$137.8 million in net proceeds from the issuance of common stock in a public offering inMay 2019 and$15.6 million in proceeds from the exercise of options to purchase our common stock and purchase of stock under our ESPP, during the year, partially offset by$24.9 million of loan principal repayments,$1.0 million in tax payments during the period related to the vesting of restricted stock units granted to employees and finance lease payments of$0.3 million . Cash provided by financing activities for the year endedDecember 31, 2018 was$59.5 million , consisting of$55.0 million in net proceeds from the issuance of common stock in a public offering in the second quarter of 2018,$4.4 million in proceeds from the exercise of options to purchase our common stock and purchases under our ESPP and$0.4 million in proceeds from a legal settlement, partially offset by capital lease payments of$0.3 million during the period. 84 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations
The following table summarizes certain contractual obligations as of
Payments Due by Period
Fiscal Year
Fiscal Year Fiscal Year Fiscal Year 2026 and
2021 2022 to 2023 2024 to 2025 Beyond Total
Operating lease obligations (1) $ 2,401 $ 5,015
- 1,188 - - 1,188
Supplies purchase commitments 3,949 820 - - 4,769
Total $ 6,350 $ 7,023
In
Off-balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Recent Accounting Pronouncements
InJune 2016 , the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings and report credit losses using an expected losses model rather than the incurred losses model that was previously used, and establishes additional disclosures related to credit risks. This guidance became effective for us beginningJanuary 1, 2020 . Based on the composition of our trade receivables, investment portfolio and other financial assets, current economic conditions and historical credit loss activity, the adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures. InAugust 2018 the FASB issued ASU No. 2018-15, Intangibles-Goodwill andOther-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard clarifies the accounting for implementation costs in cloud computing arrangements by aligning the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. This standard became effective for us onJanuary 1, 2020 and was adopted on a prospective basis with no material impact on our consolidated financial statements. InAugust 2018 , the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. ASU 2018-13 removed the following disclosure requirements: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. Additionally, this update added the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income and loss for recurring Level 3 fair value measurements held at the end of the reporting period; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 became effective for us beginningJanuary 1, 2020 and the adoption of ASU 2018-13 did not have a material impact on our consolidated financial statements. 85
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