Business Combination

3 Months Ended

Mar. 31, 2024

Business Combination and Asset Acquisition [Abstract]

On February 5, 2024, or the Closing Date, the Company acquired 100% of the outstanding equity interests of C2i, or the C2i Acquisition. C2i was a privately-held company that developed a novel method for estimating tumor burden in cancer patients by analyzing a patient’s cell free DNA sequence and offered post-surgery monitoring of cancer recurrence and progression by analyzing subtle changes in the pattern of the tumor’s DNA. The consideration to acquire C2i was $100.2 million, comprised of $73.3 million in the form of approximately 2.7 million shares of the Company’s common stock based on the Company's share price on the Closing Date, $0.8 million of pre-combination portion of replacement stock options issued to C2i’s continuing employees, $17.2 million of contingent consideration that has been agreed to be paid on achievement of certain milestones and the remainder in cash. The Company incurred $4.9 million of transaction costs related to the of C2i Acquisition, which were recorded as general and administrative expense.

As part of the agreement, the Company deposited $8.0 million of the cash consideration into escrow for meeting any unresolved or unsatisfied claims for indemnifiable damages against C2i and any special tax claims. The balance after meeting these indemnification obligations will be paid directly to the securityholders of C2i. After deducting the expenses for indemnifiable damages and tax claims the escrow amount of $5.0 million will be released 18 months from the Closing Date and the balance of $3.0 million will be released 36 months after the Closing Date. As this payment is dependent on the resolution of claims that existed as of the Closing Date, the amount deposited into escrow is included in the purchase price.

In addition, pursuant to the Agreement and Plan of Merger, dated as of January 5, 2024, by and among the Company, C2i, Canary Merger Sub I, Inc., a Delaware corporation and wholly owned subsidiary of the Company, Veracyte Diagnostics, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company, and Fortis Advisors LLC, as the securityholders’ agent, or the Merger Agreement, the C2i noteholders are entitled to receive from the Company up to $25.0 million in contingent consideration that is dependent on the achievement of specified training requirements, licensing, regulatory and commercialization milestones and are payable in cash or shares of the Company’s common stock, at the Company's election.

The Company included financial results of C2i in its consolidated financial statements from the acquisition date, which contributed zero and $4.2 million of revenue and operating loss, respectively, including $1.3 million of severance and retention charges and $0.7 million of impairment of right-of-use asset and intangible asset amortization during the three months ended March 31, 2024.

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the preliminary fair values of assets acquired and liabilities assumed in the C2i Acquisition at the Closing Date (in thousands):


	Amount
Assets acquired:
Cash and cash equivalents	$	13,677
Prepaid expenses and other current assets	998
Property, plant and equipment, net	277
Right of use assets, operating leases	1,277
Intangible assets, net	31,500
Restricted cash	188
Total identifiable assets acquired	47,917
Accounts payable	(59)
Accrued Liabilities	(1,540)
Current portion of deferred revenue	(94)
Current portion of operating lease liabilities	(441)
Deferred tax liability	(726)
Operating lease liabilities, net of current portion	(836)
Net identifiable assets acquired	44,221
Goodwill	55,974
Total purchase price	$	100,195

Based on the guidance provided in ASC 805 Business Combinations, the Company accounted for the C2i Acquisition as a business combination in which the Company determined that C2i was a business which combines inputs and processes to create outputs, and substantially all of the fair value of gross assets acquired was not concentrated in a single identifiable asset or group of similar identifiable assets.

The Company's purchase price allocation for the C2i Acquisition is preliminary and subject to revision as additional information about the fair value of the assets and liabilities becomes available. The fair values assigned to tangible and intangible assets acquired, and liabilities assumed, are based on management’s estimates and assumptions and may be subject to change as additional information is received. Primary areas that are not yet finalized are related to certain income tax items, intangible assets and goodwill. Additional information that existed as of the closing date but not known at the time of this filing may become known to the Company during the remainder of the measurement period, a period not to exceed 12 months from the Closing Date.

The intangible assets acquired included IPR&D assets and developed technology. The preliminary fair value of the Company's intangible assets as of the acquisition date and the method used to value these assets as well as the estimated economic lives for amortizable intangible assets were as follows (in thousands, except useful life which is in years):

Fair Value

Estimated Useful Life

Valuation Method

Intangible Assets Acquired:

Developed Technology

25,300

Relief from royalty method

IPR&D assets

6,200

Indefinite

Multi-period excess earnings method

Total intangible assets acquired

31,500

The amortization expense for all acquired intangible assets will be recognized on a straight-line basis and recorded within intangible asset amortization.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The C2i acquisition resulted in the recognition of $56.0 million of goodwill which the Company believes consists primarily of expanded market and product opportunities, including an MRD platform, which will enable new areas of genomic testing.

In connection with the C2i Acquisition, a net deferred tax liability was assumed with a fair value of $0.7 million which primarily relates to future intangible asset amortization which is not deductible for income tax purposes.

Pro forma financial information (unaudited)

The supplemental pro forma financial information has been prepared using the acquisition method of accounting and is based on the historical financial information of C2i. The supplemental pro forma financial information does not necessarily represent what the combined companies' revenue or results of operations would have been had the acquisitions been completed on January 1, 2023, nor is it intended to be a projection of future operating results of the combined company. It also does not reflect any operating efficiencies or potential cost savings that might be achieved from synergies of combining C2i and the Company.

The unaudited supplemental pro forma financial information has been calculated after adjusting the results of the combined company to reflect incremental amortization expense resulting from the fair value adjustments for acquired intangible assets. Further, adjustments related to transaction costs and stock- based compensation expense are also reflected in the pro forma financial information in the table below:


	For the three months ended March 31,
	2024		2023
Total revenue	$	96,844	$	82,422
Net loss	$	(4,019)	$	(20,087)