Organization and Summary of Significant Accounting Policies | 9 Months Ended |
Sep. 30, 2013 |
Organization and Summary of Significant Accounting Policies | ' |
Organization and Summary of Significant Accounting Policies | ' |
1. Organization and Summary of Significant Accounting Policies |
|
Veracyte, Inc. (the “Company”) 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. Veracyte is a diagnostics company pioneering the field of molecular cytology to improve patient outcomes and lower healthcare costs. The Company specifically targets diseases that often require invasive procedures for an accurate diagnosis — diseases where many healthy patients undergo costly interventions that ultimately prove unnecessary. The Company improves the accuracy of diagnosis at an earlier stage of patient care by deriving clinically actionable genomic information from cytology samples collected in an outpatient setting. The Company’s first commercial solution, the Afirma Thyroid FNA Analysis, includes as its centerpiece the Gene Expression Classifier (“GEC”). The GEC helps physicians reduce the number of unnecessary surgeries by employing a proprietary 142-gene signature to preoperatively determine whether thyroid nodules previously classified by cytopathology as indeterminate can be reclassified as benign. The Company’s operations are based in South San Francisco, California and Austin, Texas, and it operates in one segment. |
|
Initial Public Offering |
|
On November 4, 2013, the Company completed an initial public offering (“IPO”) of its common stock. In connection with its IPO, the Company issued and sold 5,000,000 shares of its common stock at a price to the public of $13.00 per share. As a result of the IPO, the Company received approximately $57.9 million in net proceeds, after deducting underwriting discounts and commissions of $4.6 million and estimated offering expenses of $2.5 million payable by the Company. The condensed financial statements, including share and per share amounts, do not give effect to the IPO. |
|
Reverse Stock Split |
|
On October 9, 2013, the Company filed a Certificate of Amendment to its Fourth Amended and Restated Certificate of Incorporation to effect a four-for-one reverse stock split of its outstanding common stock. The par value per share and the authorized number of shares of common stock and preferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding shares of common stock, options to purchase common stock and related per share amounts contained in the unaudited interim condensed financial statements have been retroactively adjusted to reflect the reverse stock split for all periods presented. A proportional adjustment to the conversion ratio for each series of convertible preferred stock was also effected in connection with the reverse stock split. The unaudited interim condensed financial statements have not been retroactively adjusted to give effect to the conversion of the preferred stock into 0.25 of a share of common stock upon the closing of the IPO. |
|
Basis of Presentation |
|
The accompanying unaudited interim condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information in accordance with Securities and Exchange Commissions (“SEC”) instructions for interim financial reporting and assume the Company will continue as a going concern. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The financial information for the three and nine months ended September 30, 2013 and 2012 is unaudited but includes all adjustments (consisting of only normal recurring adjustments), which the Company considers necessary for a fair presentation of the results of operations for those periods. Interim results are not necessarily indicative of results for the full fiscal year. |
|
The unaudited interim condensed financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2012 included in the Registration Statement on Form S-1 (No. 333-191282) filed by the Company with the SEC on September 20, 2013, as amended. |
|
Use of Estimates |
|
The preparation of unaudited interim condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates include: revenue recognition; allowance for doubtful accounts; the useful lives of property and equipment; the recoverability of long-lived assets; the determination of fair value of the Company’s common stock, stock options, and preferred stock liability; income tax uncertainties, including a valuation allowance for deferred tax assets; 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. |
|
Concentrations of Credit Risk and Other Risks and Uncertainties |
|
The Company’s cash and cash equivalents are deposited with two major financial institutions in the United States of America. Deposits in these institutions may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents. |
|
Several of the components of the Company’s sample collection kit and test reagents 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 Afirma, a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results. |
|
The Company is also subject to credit risk from its accounts receivable related to its sales of Afirma. The Company generally does not perform evaluations of customers’ financial condition and generally does not require collateral. All of the Company’s accounts receivables are derived from sales of Afirma in the United States. |
|
As of September 30, 2013 and 2012, all of the Company’s revenue is derived from the sale of Afirma. To date, Afirma has been available only to physicians in the United States. The Company’s significant third-party payers and their related revenue as a percentage of revenue were as follows: |
|
| | Nine Months | |
Ended |
September 30, |
| | 2013 | | 2012 | |
Medicare | | 33% | | 35% | |
Aetna | | 8% | | 13% | |
United Healthcare | | 17% | | 12% | |
| | 58% | | 60% | |
|
Accounts receivable from Medicare amounted to 79% and 87% of gross receivables as of September 30, 2013 and December 31, 2012, respectively. No other third-party payer represented more than 10% of the Company’s revenues or accounts receivable balances for these periods. |
|
Cash and Cash Equivalents |
|
Cash and cash equivalents consist of all highly liquid investments with original maturities of three months or less from the date of purchase. Cash equivalents consist primarily of amounts invested in money market accounts. |
|
Restricted Cash |
|
At September 30, 2013 and December 31, 2012, deposits of $118,000 and $168,000 were restricted from withdrawal and held by a bank in the form of certificates of deposit and collateral for letters of credit. The balances at September 30, 2013 and December 31, 2012 consisted of a $118,000 letter of credit related to security for the lease of office space. In addition, the balances at December 31, 2012 also included a certificate of deposit of $50,000 held as collateral for payment of the Company’s credit cards. |
|
Allowance for Doubtful Accounts |
|
The Company accrues an allowance for doubtful accounts against its accounts receivable based on estimates consistent with historical collection experience in relation to amounts billed. Bad debt expense is included in general and administrative expense on the Company’s statements of operations and comprehensive loss. Accounts receivable are written off against the allowance when the claims appeals process is exhausted or when there is other substantive evidence that the account will not be paid. The Company’s allowance for doubtful accounts as of September 30, 2013 and December 31, 2012 was $364,000 and $222,000, respectively. The provision for bad debt expense was $66,000 and $58,000 for the three months ended September 30, 2013 and 2012, respectively, and $184,000 and $144,000 for the nine months ended September 30, 2013 and 2012, respectively. There were $34,000 in write-offs for doubtful accounts against the allowance during the nine months ended September 30, 2013. |
|
Supplies Inventory |
|
Supplies inventory consists of test reagents and other consumables used in the sample collection kits and in the performance of testing services for cytopathology and for the GEC. Supplies inventory is valued at the lower of cost or market value. Cost is determined using actual costs on a first-in, first-out basis. |
|
Internal-use Software |
|
Capitalized software costs consist of third-party costs incurred in the application development stage to design and implement the software that is used in the GEC. Costs incurred in the development of software are capitalized and amortized over an estimated useful life of three years on a straight line basis. During the nine months ended September 30, 2013 and 2012, the Company capitalized $211,000 and $173,000 of software development costs, respectively. Capitalized software is classified as part of property and equipment, and had a net book value of $321,000 and $184,000 as of September 30, 2013 and December 31, 2012, respectively. |
|
Bonus Accruals |
|
The Company accrues for liabilities under discretionary employee and executive bonus plans. These estimated compensation liabilities are based on progress against corporate objectives approved by the Board of Directors, compensation levels of eligible individuals, and target bonus percentage levels. The Board of Directors and the Compensation Committee of the Board of Directors review and evaluate the performance against these objectives and ultimately determine what discretionary payments are made. At September 30, 2013 and December 31, 2012, the Company accrued $639,000 and $671,000, respectively, for liabilities associated with these employee and executive bonus plans. |
|
Revenue Recognition |
|
The Company’s revenue is generated from the provision of diagnostic services using its Afirma solution. Service is completed upon the delivery of test results to the prescribing physician which triggers the billing for the service. The Company recognizes revenue related to billings for commercial carriers or governmental programs subject to contractual arrangements and when there is a predictable pattern of collectability on an accrual basis, net of contractual adjustments. These contractual adjustments represent the difference between the list price (the billing rate) and the reimbursement rate set by commercial or governmental payers. Until a contract has been negotiated with a commercial carrier or governmental program, the Afirma solution may or may not be covered by these entities’ existing reimbursement policies. In addition, patients do not enter into direct agreements with us that commit them to pay any portion of the cost of the tests in the event that their insurance declines to reimburse the Company. In the absence of an agreement or other clearly enforceable legal right to demand payment, when test services are provided to patients with non-contracted insurance carriers or no insurance, the related revenue is only recognized upon the earlier of payment notification, if applicable, or cash receipt. |
|
For all services performed, the Company considers whether or not the following revenue recognition criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. |
|
Persuasive evidence of an arrangement exists and delivery is deemed to have occurred upon delivery of a patient report to the prescribing physician. The assessment of the fixed or determinable nature of the fees charged for testing performed and the collectability of those fees require significant judgment by management. Management believes that these two criteria have been met when there is contracted reimbursement coverage and/or a predictable pattern of collectability with individual third-party payers and accordingly, recognizes revenue upon delivery of the patient report. Some patients have out-of-pocket costs for amounts not covered by their insurance carrier, and the Company may bill the patient directly for these amounts in the form of co-payments and co-insurance in accordance with their insurance carrier and health plans. Some payers may not cover the GEC as ordered by the prescribing physician under their reimbursement policies. The Company pursues reimbursement from such patients on a case-by-case basis. In the absence of contracted reimbursement coverage or a predictable pattern and history of collectability, the Company believes that the fee is fixed or determinable and collectability is reasonably assured only upon receipt of third-party payer notification of payment or when cash is received and accordingly, recognizes revenue at that time. |
|
Net Loss per Common Share |
|
Basic net loss per common share is calculated by dividing net loss for the period 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 the loss for the period by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. Potentially dilutive securities consisting of convertible preferred stock and options to purchase common stock are considered to be common stock equivalents and were excluded from the calculation of diluted net loss per common share because their effect would be antidilutive for all periods presented. |
|
Recent Accounting Pronouncements |
|
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires reporting and disclosure about changes in accumulated other comprehensive income balances and reclassifications out of accumulated other comprehensive income. The Company adopted this guidance as of January 1, 2013 on a prospective basis and the adoption did not have a material effect on the Company’s financial statements as the Company does not have comprehensive income (loss). |
|
In June 2011, the FASB issued authoritative guidance requiring companies to present items of net income, items of other comprehensive income and total comprehensive income in one continuous statement or two consecutive statements. This guidance eliminates the option for companies to present other comprehensive income in the statement of stockholders’ equity. The Company adopted this guidance as of January 1, 2012. As this guidance provides only presentation requirements, the adoption of this guidance did not impact the Company’s financial condition or results of operations. |
|
In May 2011, the FASB issued authoritative guidance to achieve common fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards. This new literature amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company adopted this standard as of January 1, 2012, as reflected in Note 3 to the unaudited interim condensed financial statements. |