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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
  
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2021
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to            
 
Commission file number 001-36156
VERACYTE, INC.
(Exact name of registrant as specified in its charter)
Delaware 20-5455398
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
 
6000 Shoreline Court, Suite 300
South San Francisco, California 94080
(Address of principal executive offices, zip code)
 
(650)  243-6300
(Registrant’s telephone number, including area code)
  
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value, $0.001 per shareVCYTThe Nasdaq Stock Market LLC
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
 


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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company 
  Emerging growth company 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No x
 
As of November 3, 2021, there were 71,043,062 shares of common stock, par value $0.001 per share, outstanding.




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VERACYTE, INC.
INDEX
 
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PART I. — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements-(Unaudited)

VERACYTE, INC. 
Condensed Consolidated Balance Sheets 
(unaudited)
(In thousands, except share and per share amounts)
 
 September 30, 2021December 31, 2020
  (See Note 1)
Assets  
Current assets:  
Cash and cash equivalents$164,029 $349,364 
Accounts receivable40,309 18,461 
Supplies9,824 4,657 
Prepaid expenses and other current assets15,146 3,197 
Total current assets229,308 375,679 
Property and equipment, net14,868 8,990 
Right-of-use assets, operating lease16,001 7,843 
Intangible assets, net209,521 59,924 
Goodwill714,273 2,725 
Restricted cash749 603 
Other assets1,636 1,399 
Total assets$1,186,356 $457,163 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$11,201 $3,116 
Accrued liabilities29,044 11,705 
Current portion of deferred revenue3,440 371 
Current portion of acquisition-related contingent consideration2,646  
Current portion of operating lease liability3,465 1,589 
Current portion of other liabilities241  
Total current liabilities50,037 16,781 
Long-term debt1,075 810 
Deferred revenue, net of current portion552 829 
Deferred tax liability6,234  
Acquisition-related contingent consideration, net of current portion5,251 7,594 
Operating lease liability, net of current portion14,236 9,917 
Other liabilities1,891  
Total liabilities79,276 35,931 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020
  
Common stock, $0.001 par value; 125,000,000 shares authorized, 71,032,336 and 58,200,526 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively
71 58 
Additional paid-in capital1,461,778 702,768 
Accumulated deficit(346,629)(281,594)
Accumulated other comprehensive loss(8,140) 
Total stockholders’ equity1,107,080 421,232 
Total liabilities and stockholders’ equity$1,186,356 $457,163 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VERACYTE, INC.
 Condensed Consolidated Statements of Operations
 (Unaudited)
 (In thousands, except share and per share amounts)

 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Revenue:    
Testing revenue$50,897 $28,270 $134,768 $70,473 
Product revenue2,959 2,027 8,706 7,149 
Biopharmaceutical and other revenue6,514 824 8,704 5,325 
Total revenue60,370 31,121 152,178 82,947 
Operating expenses:
Cost of testing revenue16,073 9,118 42,494 26,157 
Cost of product revenue1,491 1,048 4,304 3,539 
Cost of biopharmaceutical and other revenue4,079 204 4,720 572 
Research and development8,006 4,042 19,591 12,618 
Selling and marketing21,670 10,955 57,628 39,240 
General and administrative20,749 8,546 82,504 24,316 
Intangible asset amortization4,983 1,274 10,507 3,822 
Total operating expenses77,051 35,187 221,748 110,264 
Loss from operations(16,681)(4,066)(69,570)(27,317)
Other income (loss), net1,202 (58)(762)452 
Loss before income tax benefit(15,479)(4,124)(70,332)(26,865)
Income tax benefit(1,350) (5,297) 
Net loss$(14,129)$(4,124)$(65,035)$(26,865)
Net loss per common share, basic and diluted$(0.20)$(0.08)$(0.97)$(0.52)
Shares used to compute net loss per common share, basic and diluted69,743,733 54,858,052 66,820,654 51,632,750 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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VERACYTE, INC.
 Condensed Consolidated Statements of Comprehensive Loss
 (Unaudited)
 (In thousands)

 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Net loss$(14,129)$(4,124)$(65,035)$(26,865)
Other comprehensive loss:
Change in currency translation adjustments(8,140) (8,140) 
Net comprehensive loss$(22,269)$(4,124)$(73,175)$(26,865)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VERACYTE, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(In thousands)
 
 Common StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal
Stockholders'
Equity
 SharesAmount
Balance at June 30, 202167,472 $67 $1,303,610 $(332,500)$ $971,177 
Issuance of common stock for acquisition3,347 3 147,086 — — 147,089 
Issuance of common stock on exercise of stock options and vesting of restricted stock units181 1 2,843 — — 2,844 
Issuance of common stock under employee stock purchase plan (ESPP)32 — 1,195 — — 1,195 
Tax portion of vested restricted stock units— — (824)— — (824)
Stock-based compensation expense (employee)— — 7,359 — — 7,359 
Stock-based compensation expense (non-employee)— — 15 — — 15 
Stock-based compensation expense (ESPP)— — 494 — — 494 
Net loss— — — (14,129)— (14,129)
Comprehensive loss— — — — (8,140)(8,140)
Balance at September 30, 202171,032 $71 $1,461,778 $(346,629)$(8,140)$1,107,080 
Balance at December 31, 202058,201 $58 $702,768 $(281,594)$ $421,232 
Sale of common stock in a public offering, net of offering costs of $38,677
8,547 9 593,812 — — 593,821 
Issuance of common stock for acquisition3,347 3 147,086 — — $147,089 
Issuance of common stock upon exercise of stock options and vesting of restricted stock units856 1 8,279 — — 8,280 
Issuance of common stock under employee stock purchase plan (ESPP)81 — 2,353 — — 2,353 
Tax portion of vested restricted stock units— — (8,307)— — (8,307)
Stock-based compensation expense (employee)— — 14,687 — — 14,687 
Stock-based compensation expense (non-employee)— — 45 — — 45 
Stock-based compensation expense (ESPP)— — 1,055 — — 1,055 
Net loss— — — (65,035)— (65,035)
Comprehensive loss— — — — (8,140)(8,140)
Balance at September 30, 202171,032 $71 $1,461,778 $(346,629)$(8,140)$1,107,080 

The accompanying notes are an integral part of these condensed consolidated financial statements.
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VERACYTE, INC.
Condensed Consolidated Statements of Stockholders' Equity (Continued)
(Unaudited)
(In thousands)
 
 Common StockAdditional Paid-in
Capital
Accumulated
Deficit
Total Stockholders' Equity
 SharesAmount
Balance at June 30, 202050,446 $50 $495,523 $(269,426)$226,147 
Sale of common stock in a public offering, net of offering costs of $13,169
6,900 7 193,824 — 193,831 
Issuance of common stock on exercise of stock options and vesting of restricted stock units427 1 3,328 — 3,329 
Issuance of common stock under ESPP41 — 935 — 935 
Tax portion of vested restricted stock units— — (483)— (483)
Stock-based compensation expense (employee)— — 3,032 — 3,032 
Stock-based compensation expense (non-employee)— — 15 — 15 
Stock-based compensation expense (ESPP)— — 43 — 43 
Net loss and comprehensive loss— — — (4,124)(4,124)
Balance at September 30, 202057,814 $58 $696,217 $(273,550)$422,725 
Balance at December 31, 201949,625 $50 $486,090 $(246,685)$239,455 
Sale of common stock in a public offering, net of offering costs of $13,169
6,900 7 193,824 — 193,831 
Issuance of common stock upon exercise of stock options and vesting of restricted stock units1,187 1 8,073 — 8,074 
Issuance of common stock under ESPP102 — 2,037 — 2,037 
Tax portion of vested restricted stock units— — (3,161)— (3,161)
Stock-based compensation expense (employee)— — 8,591 — 8,591 
Stock-based compensation expense (non-employee)— — 35 — 35 
Stock-based compensation expense (ESPP)— — 728 — 728 
Net loss and comprehensive loss— — — (26,865)(26,865)
Balance at September 30, 202057,814 $58 $696,217 $(273,550)$422,725 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VERACYTE, INC.  
Condensed Consolidated Statements of Cash Flows 
(Unaudited) 
(In thousands)
 Nine Months Ended September 30,
 20212020
Operating activities  
Net loss$(65,035)$(26,865)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization13,189 5,919 
Stock-based compensation15,787 9,354 
Benefit from income taxes(5,297) 
Interest on end-of-term debt obligation161 162 
Write-down of excess supplies 1,088 
Noncash lease expense1,566 714 
Revaluation of acquisition-related contingent consideration303 332 
Effect of foreign currency on operations1,601 (17)
Changes in operating assets and liabilities:
Accounts receivable(6,285)1,742 
Supplies4 1,262 
Prepaid expenses and other current assets(1,905)(923)
Other assets353 134 
Operating lease liability(1,710)(1,040)
Accounts payable3,872 (534)
Accrued liabilities and deferred revenue3,329 (3,300)
Net cash used in operating activities(40,067)(11,972)
Investing activities
Acquisition of Decipher Biosciences, net of cash acquired(574,411) 
Acquisition of HalioDx, net of cash acquired(163,645) 
Proceeds from sale of equity securities3,000  
Purchase of equity securities (1,000)
Purchases of property and equipment(4,535)(1,949)
Net cash used in investing activities(739,591)(2,949)
Financing activities
Proceeds from the issuance of common stock in a public offering, net of issuance costs593,821 193,831 
Payment of long-term debt (100)
Payment of taxes on vested restricted stock units(8,307)(3,161)
Proceeds from the exercise of common stock options and employee stock purchases10,633 10,114 
Net cash provided by financing activities596,147 200,684 
(Decrease) increase in cash, cash equivalents and restricted cash(183,511)185,763 
Effect of foreign currency on cash, cash equivalents and restricted cash(1,678) 
Net (decrease) increase in cash, cash equivalents and restricted cash(185,189)185,763 
Cash, cash equivalents and restricted cash at beginning of period349,967 159,920 
Cash, cash equivalents and restricted cash at end of period$164,778 $345,683 
Supplementary cash flow information:
Purchases of property and equipment included in accounts payable and accrued liability$31 $355 
Interest paid on debt$9 $3 
Issuance of common stock for acquisition of HalioDx$147,089 $ 
Cash, Cash Equivalents and Restricted Cash:
 September 30, 2021December 31, 2020
Cash and cash equivalents$164,029 $349,364 
Restricted cash749 603 
Total cash, cash equivalents and restricted cash$164,778 $349,967 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)

1. Organization, Description of Business and Summary of Significant Accounting Policies
 
Veracyte, Inc., or Veracyte, or the Company, is a global diagnostics company that improves patient care by answering important clinical questions to inform diagnosis and treatment decisions throughout the patient journey in cancer and other diseases. The Company’s growing menu of tests leverage advances in genomic science and machine learning technology to change care for patients, enabling them to avoid unnecessary and potentially harmful procedures and interventions, and accelerate time to more appropriate treatment. In addition to making its tests available in the United States through its central laboratories, the Company believes its exclusive access to the nCounter Analysis System, a best-in-class diagnostics platform, positions the company to deliver its tests to patients worldwide through laboratories and hospitals that can perform them locally. In August 2021, Veracyte acquired HalioDx SAS, giving Veracyte the ability to manufacture its own in vitro diagnostic tests for use on the nCounter, while also deepening Veracyte’s scientific capabilities into immuno-oncology and expanding its presence into eight of the ten most common cancers by incidence in the United States that impact patients globally.

Veracyte was incorporated in the state of Delaware on August 15, 2006, as Calderome, Inc. Calderome operated as an incubator until early 2008. On March 4, 2008, the Company changed its name to Veracyte, Inc. The Company’s headquarters are in South San Francisco, California, and it also has operations in San Diego, California; Austin, Texas; Richmond, Virginia; Vancouver, Canada; and Marseille, France. It performs diagnostic testing in its Clinical Laboratory Improvement Amendments of 1988, or CLIA, certified laboratories in South San Francisco, San Diego, Austin, Richmond and Marseille.

Veracyte’s foundational approach for its tests, or classifiers, begins with determining what clinical questions need to be answered in order to inform what happens next for the patient. The Company deploys rigorous science and technology to develop and validate its tests and collects extensive clinical utility data to demonstrate the tests’ ability to influence care. This approach has enabled the Company to obtain Medicare reimbursement for its genomic classifiers in each of its clinical indications. The Company positions its tests to integrate seamlessly into the way physicians currently evaluate patients, to facilitate adoption.

Veracyte currently offers genomic tests, which it believes are changing patient care in lung cancer (Percepta); prostate and bladder urologic cancers (Decipher); thyroid cancer (Afirma); breast cancer (Prosigna); and interstitial lung diseases, or ILD, including idiopathic pulmonary fibrosis, or IPF (Envisia). The Company’s genomic classifiers in each of these indications are covered by Medicare. Additionally, through its acquisition of HalioDx, the Company also offers a clinically validated immuno-oncology test in colon cancer (Immunoscore).

The Company performs its genomic tests for thyroid cancer, lung cancer and IPF in its CLIA-certified laboratory in South San Francisco, California, and its genomic tests for prostate and bladder cancer in its College of American Pathologists, or CAP, accredited and CLIA-certified laboratory in San Diego, California. In 2019, the Company acquired from NanoString, Inc. the exclusive global diagnostics license to the nCounter Analysis System and the Prosigna Breast Cancer Prognostic Gene Signature Assay, which is commercially available, along with the LymphMark lymphoma subtyping assay, which is in development for use as a companion diagnostic with Acerta Pharma’s and AstraZeneca’s Calquence. Both tests are designed for use on the nCounter Analysis System. The Prosigna test kits and associated products are sold to laboratories and hospitals globally. Additionally, the Company’s Immunoscore Colon Cancer test is performed in Veracyte’s CLIA-certified laboratories in Marseille, France, and Richmond, Virginia.

Veracyte’s scientific approach and capabilities in genomics and immuno-oncology also provide multiple opportunities for partnerships with biopharmaceutical and diagnostic testing companies. In developing and commercializing its products, the Company has built or gained access to unique data and sample biorepositories, and proprietary technology and bioinformatics that it believes are important to the development of new targeted therapies, determining clinical trial eligibility and guiding treatment selection.

On August 2, 2021, Veracyte acquired HalioDx SAS, a French société par actions simplifiée, or HalioDx, an immuno-oncology diagnostics company providing oncologists and drug development organizations with diagnostic products and biopharmaceutical services to guide cancer care and contribute to precision medicine. Veracyte believes the acquisition provides three strategic benefits to the company: 1.) it provides Veracyte with the expertise to develop and manufacture IVD test kits for the nCounter diagnostics platform; 2.) it deepens the company’s scientific capabilities into immuno-oncology; and 3.) it expands Veracyte’s cancer diagnostic scope to eight of the top 10 cancers by U.S. incidence. Veracyte paid $321 million
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
in total consideration to HalioDx security holders, consisting of $170 million in cash, $147 million in stock and $4 million in incurred liabilities.
 
Basis of Presentation
 
The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of September 30, 2021 the condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020, the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2021 and 2020, the condensed consolidated statements of stockholders' equity for the three and nine months ended September 30, 2021 and 2020, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of its financial position, operating results, stockholders' equity and cash flows for the periods presented. The condensed consolidated balance sheet as of December 31, 2020 has been derived from audited financial statements. The results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results expected for the full year or any other period. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company operates in one segment.
 
The accompanying interim period condensed consolidated financial statements and related financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
 
Use of Estimates
 
The preparation of unaudited interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Items subject to such estimates include: revenue recognition; write-down of supplies; the useful lives of property and equipment; the recoverability of long-lived assets; the incremental borrowing rate for leases; accounting for acquisitions; the estimation of the fair value of intangible assets and contingent consideration; stock options; income tax uncertainties, including a valuation allowance for deferred tax assets; an allowance for credit losses and contingencies. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions.

Issuance of Common Stock in a Public Offering
 
On February 9, 2021, the Company issued and sold 8,547,297 shares of common stock in a registered public offering, including 1,114,864 shares issued and sold upon the underwriters’ exercise in full of their option to purchase additional shares, at a price to the public of $74.00 per share. The Company's net proceeds from the offering were approximately $593.8 million, after deducting underwriting discounts and commissions and offering expenses of $38.7 million.
 
Cash and Cash Equivalents
 
The Company considers demand deposits in a bank, money market funds and highly liquid investments with an original maturity of 90 days or less to be cash equivalents.

Concentrations of Credit Risk and Other Risks and Uncertainties
 
The worldwide spread of coronavirus, or COVID-19, has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have. As a result, the ultimate impact of COVID-19 and the extent to which COVID-19 impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
predict. If the financial markets or the overall economy are impacted for an extended period, the Company’s liquidity, revenues, supplies, goodwill and intangibles may be adversely affected. The Company considers the effects, to the extent knowable, of the COVID-19 pandemic in developing our estimates.
 
The majority of the Company’s cash and cash equivalents are deposited with one major financial institution in the United States. Deposits in this institution may exceed the amount of insurance provided on such deposits. The Company has not realized any losses on its deposits of cash and cash equivalents other than exchange rate losses related to foreign currency denominated accounts.
 
Several of the components of the Company’s sample collection kits and test reagents, and the nCounter system and related diagnostic kits are obtained from single-source suppliers. If these single-source suppliers fail to satisfy the Company’s requirements on a timely basis, it could suffer delays in being able to deliver its diagnostic solutions, suffer a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results.
 
Through September 30, 2021, most of the Company’s revenue has been derived from the sale of Afirma and Decipher testing. To date, Afirma and Decipher testing have been delivered primarily to physicians in the United States.

The Company is also subject to credit risk from its accounts receivable related to its sales. Credit risk for accounts receivable from testing revenue is incorporated in testing revenue accrual rates as the Company assesses historical collection rates and current developments to determine accrual rates and amounts the Company will ultimately collect. The Company generally does not perform evaluations of customers’ financial condition for testing revenue and generally does not require collateral. The Company assesses credit risk and the amount of accounts receivable the Company will ultimately collect for product, biopharmaceutical and collaboration revenue based on collection history, current developments and credit worthiness of the customer. The estimate of credit losses is not material at September 30, 2021.

The Company’s third-party payers and other customers in excess of 10% of total revenue and their related revenue as a percentage of total revenue were as follows:
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Medicare31 %25 %31 %24 %
UnitedHealthcare9 %11 %10 %11 %
 40 %36 %41 %35 %

 
The Company’s third-party payers and other customers in excess of 10% of accounts receivable and their related accounts receivable balance as a percentage of total accounts receivable were as follows at the following dates:
 
 September 30, 2021December 31, 2020
Medicare11 %13 %
UnitedHealthcare9 %12 %

Restricted Cash
 
The Company had deposits of $749,000 and $603,000 included in long-term assets as of September 30, 2021 and December 31, 2020, respectively, restricted from withdrawal and held by banks in the form of collateral for irrevocable standby letters of credit held as security for the Company's leases.
 
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
Revenue Recognition
 
Testing Revenue
 
The Company recognizes testing revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers, or ASC 606. The Company bills for testing services at the time of test completion as defined by the delivery of test results. The Company recognizes revenue based on estimates of the amount that will ultimately be realized. In determining the amount to accrue for a delivered test, the Company considers factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. These estimates require significant judgment by management. Actual results could differ from those estimates and assumptions.
 
During 2021, the Company changed its revenue estimates due to actual and anticipated cash collections for tests delivered in prior quarters and recognized additional revenue of $0.5 million and $0.9 million for the three and nine months ended September 30, 2021, respectively. These adjustments resulted in decreases in the Company's loss from operations of $0.5 million and $0.9 million for the three and nine months ended September 30, 2021, respectively. These adjustments resulted in a decrease in basic and diluted net loss per share of $0.01 for each of the three and nine months ended September 30, 2021.
 
During 2020, the Company changed its revenue estimates due to actual and anticipated cash collections for tests delivered in prior quarters and recognized additional revenue of $0.3 million and $1.2 million for the three and nine months ended September 30, 2020, respectively. These adjustments resulted in decreases in the Company's loss from operations of $0.3 million and $1.2 million and a decrease in basic and diluted net loss per share of zero and $0.02 for the three and nine months ended September 30, 2020, respectively.

Product Revenue
 
Product revenue from instruments and diagnostic kits is recognized generally upon shipment or when the instrument is ready for use by the end customer. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. Performance obligations are considered satisfied once the Company has transferred control of a product to the customer, meaning the customer has the ability to use and obtain the benefit of the product. The Company recognizes product revenue for satisfied performance obligations only when there are no uncertainties regarding payment terms or transfer of control. Shipping and handling costs incurred for product shipments are included in product revenue. Revenues are presented net of the taxes that are collected from customers and remitted to governmental authorities. There was no revenue from instrument sales for nine months ended September 30, 2021 or 2020.
 
Biopharmaceutical and Other Revenue
 
The Company enters into arrangements for research and development, commercialization, contract manufacturing and contract testing services. Such arrangements may require the Company to deliver various rights, manufactured diagnostic test kits, services and/or samples, including intellectual property rights/licenses, research and development services, and/or commercialization services. The underlying terms of these arrangements generally provide for consideration to the Company in the form of nonrefundable upfront license fees; payments on delivery of data, test results or manufactured products; costs of service plus margin; development and commercial performance milestone payments; royalty payments; and/or profit sharing. Net sales of data or other services to customers are recognized in accordance with ASC 606 and are classified under biopharmaceutical and other revenue. Milestone payments which fall under the scope of ASC Topic 808, Collaborative Arrangements, or ASC 808, are classified under collaboration revenue. Payments received that are not related to sales or services to a customer or collaboration revenue are recorded as offsets against research and development expense or cost of biopharmaceutical and other revenue in the Company's condensed consolidated statements of operations.

In arrangements involving more than one good or service, each required good or service is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects the Company's best estimate of what the selling price would be if the deliverable was regularly sold by the Company on a stand-alone basis or using an adjusted market assessment approach if selling price on a stand-alone basis is not available.

The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred which may be at a point in time or over time. Consideration associated with at-risk substantive performance milestones is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur. Should there be royalties, the Company utilizes the sales and usage-based royalty exception in arrangements that resulted from the license of intellectual property, recognizing revenues generated from royalties or profit sharing as the underlying sales occur.

As part of the accounting for these arrangements, the Company must develop estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligations. Generally, the estimation of the stand-alone selling price may include such estimates as independent evidence of market price, forecasted revenues or costs, development timelines, discount rates, and probabilities of technical and regulatory success. The Company evaluates each performance obligation to determine if they can be satisfied at a point in time or over time, and it measures the services delivered to the collaborative partner which are periodically reviewed based on the progress of the related program. The effect of any change made to an estimated input component and, therefore revenue or expense recognized, would be recorded as a change in estimate. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

Up-front Fees: If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from the transaction price allocated to the license when the license is transferred to the licensee and the licensee is able to use and benefit from the license. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time.

Milestone Payments: At the inception of each arrangement that includes milestone payments (variable consideration), the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within either party’s control, such as non-operational developmental and regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of milestones that are within either party’s control, such as operational developmental milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues and earnings in the period of adjustment. Revisions to the Company’s estimate of the transaction price may also result in negative revenues and earnings in the period of adjustment.

Accounts receivable from biopharmaceutical and other revenue was $9.2 million at September 30, 2021 and $0.4 million at December 31, 2020. There was $4.0 million and $1.0 million of deferred revenue related to these agreements at September 30, 2021 and December 31, 2020, respectively. Revenues included in biopharmaceutical and other revenue for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands of dollars):
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Development services$3,849 $549 $5,242 $1,780 
Provision of data1,392 275 1,839 1,545 
Milestones  350 1,000 
Development rights   1,000 
Contract manufacturing1,221  1,221  
Contract testing52  52  
Total$6,514 $824 $8,704 $5,325 

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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
Diagnostic Development Agreement with Johnson & Johnson

The Company has entered into contracts with the Lung Cancer Initiative at Johnson & Johnson to cooperate on the development of clinical data, to provide data generated by the Company and to license the right to use data under the Company's intellectual property rights. Under the terms of the agreements, the Company will provide data in exchange for up to $18.0 million in payments from Johnson & Johnson. The Company is also entitled to additional payments of up to $13.0 million, conditioned upon the achievement of certain milestones.

The agreements are considered to be within the scope of ASC 808 with respect to the milestone payments, as the parties are active participants and exposed to the risks and rewards of the collaborative activity. The delivery of data under the collaborative arrangement, which the Company believes is a distinct service for which Johnson & Johnson meets the definition of a customer is within the scope of ASC 606. Using the concepts of ASC 606, the Company has identified the delivery of data as its only performance obligation. The grant of the license is not distinct from other performance obligations as the customer receives benefit only when other performance obligations are met. The Company further determined that the transaction prices under the arrangements are the $18.0 million in payments which was allocated to the obligation to deliver data. The $13.0 million in future potential payments is considered variable consideration because the Company determined that the potential payments are contingent upon regulatory, development and commercialization milestones that are uncertain to occur and, as such, were not included in the transaction price, and will be recognized accordingly as each potential payment becomes probable.
 
For the three and nine months ended September 30, 2021, the Company recognized $0.1 million and $0.4 million, respectively, of revenue under these contracts, which is included in biopharmaceutical and other revenue. For the three and nine months ended September 30, 2020, the Company recognized $0.3 million and $1.9 million, respectively, of revenue under these contracts. Accounts receivable from Johnson & Johnson related to these contracts was $0.1 million at September 30, 2021 and zero at December 31, 2020. There was $1.1 million and $1.0 million of deferred revenue related to these agreements at September 30, 2021 and December 31, 2020, respectively.
 
Cost of Testing Revenue
 
The components of our cost of testing services are laboratory expenses, sample collection expenses, compensation expense, license fees and royalties, depreciation and amortization, other expenses such as equipment and laboratory supplies, and allocations of facility and information technology expenses. Costs associated with performing tests are expensed as the test is processed regardless of whether and when revenue is recognized with respect to that test.
 
Cost of Product Revenue
 
Cost of product revenue consists primarily of costs of purchasing instruments and diagnostic kits from third-party contract manufacturers, installation, service and packaging and delivery costs. In addition, cost of product includes royalty costs for licensed technologies included in the Company’s products and labor expenses. Cost of product revenue for instruments and diagnostic kits is recognized in the period the related revenue is recognized. Shipping and handling costs incurred for product shipments are included in cost of product in the condensed consolidated statements of operations.
 
Cost of Biopharmaceutical and Other Revenue
 
Cost of biopharmaceutical and other revenue consists of costs of performing activities under arrangements that require the Company to perform research and development, commercialization, contract manufacturing and contract testing services on behalf of a customer. 

French Research Tax Credits

The French research tax credits (“crédit d’impôt recherche” or “CIR”) is generated by the Company’s wholly owned subsidiary, HalioDx, in connection with its research efforts performed in Marseille, France. The Company recognizes other income from the CIR over time based on when the research and development expenses are incurred and includes the CIR in prepaids and other current assets on the condensed consolidated balance sheets.

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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
Foreign Currency Translation

The functional currency of the Company’s foreign subsidiary HalioDx is the Euro. Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using the exchange rates at the balance sheet date. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Revenues and expenses from the Company’s foreign subsidiaries are translated using the monthly average exchange rates in effect during the period in which the transactions occur. Foreign currency transaction gains and losses are recorded in other (loss) income, net, on the condensed consolidated statements of operations.

Pension Liability

The Company offers a defined benefit pension plan to certain non-U.S. employees of its HalioDx subsidiary. As of September 30, 2021, the total pension obligation is $1.1 million and is included in other liabilities on the condensed consolidated balance sheets.

Recent Accounting Pronouncements
 
In December 2019, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. This ASU removes the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this ASU also improve consistency and simplify other areas of Topic 740 by clarifying and amending existing guidance. The revised guidance will be applied prospectively and became effective for the Company beginning January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on our condensed consolidated financial statements.
 
2. Net Loss Per Common Share
 
Basic net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. The following outstanding common stock equivalents have been excluded from diluted net loss per common share because their inclusion would be anti-dilutive:
 
 Three Months Ended September 30,Nine Months Ended September 30,
 2021202020212020
Shares of common stock subject to outstanding options3,668,179 4,492,414 3,817,351 4,691,424 
Employee stock purchase plan14,445 15,673 16,686 20,151 
Restricted stock units1,246,888 891,087 1,011,466 929,968 
Total common stock equivalents4,929,512 5,399,174 4,845,503 5,641,543 

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3. Balance Sheet Components

Goodwill

The changes in the carrying amounts of goodwill were as follows (in thousands of dollars):

Amounts
Balance as of December 31, 2020
$2,725 
Goodwill acquired - Decipher Biosciences468,253 
Goodwill acquired - HalioDx249,612 
Effect of foreign currency translation on Goodwill acquired - HalioDx(6,317)
Balance as of September 30, 2021
$714,273 

Intangible Assets, Net

Intangible assets include finite-lived product technology, customer relationships, licenses and trade names and indefinite-lived in-process research and development. Intangible assets consisted of the following (in thousands of dollars):

 September 30, 2021December 31, 2020Weighted Average Amortization Period (Years)
 Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Percepta product technology$16,000 $(6,933)$9,067 $16,000 $(6,133)$9,867 15
Prosigna product technology4,120 (504)3,616 4,120 (298)3,822 15
Prosigna customer relationships2,430 (891)1,539 2,430 (526)1,904 5
nCounter Dx license46,880 (5,730)41,150 46,880 (3,386)43,494 15
LymphMark product technology990 (259)731 990 (153)837 7
Decipher product technology90,000 (4,984)85,016    10
Decipher trade names4,000 (443)3,557    5
HalioDx developed technology46,720 (772)45,948    10
HalioDx customer relationships4,985 (318)4,667    6
HalioDx customer backlog7,072 (142)6,930    4
Total finite-lived intangibles223,197 (20,976)202,221 70,420 (10,496)59,924 10.9
In-process research and development7,300 — 7,300 — — — 
Total intangible assets$230,497 $(20,976)$209,521 $70,420 $(10,496)$59,924 

Amortization of the finite-lived intangible assets is recognized on a straight-line basis. Amortization expense of $5.0 million and $1.3 million was recognized for the three months ended September 30, 2021 and 2020, respectively. Amortization expense of $10.5 million and $3.8 million was recognized for the nine months ended September 30, 2021 and 2020, respectively.
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The estimated future aggregate amortization expense as of September 30, 2021 is as follows (in thousands of dollars):
Year Ending December 31,Amounts
2021 remainder of year$5,542 
202222,165 
202322,165 
202422,125 
202521,679 
Thereafter108,545 
Total$202,221 
 
Accrued Liabilities

Accrued liabilities consisted of the following (in thousands of dollars):
 
 September 30, 2021December 31, 2020
Accrued compensation expenses$22,628 $9,201 
Accrued other6,416 2,504 
Total accrued liabilities$29,044 $11,705 
 
4. Business Combinations
 
HalioDx

On August 2, 2021, the Company acquired 100% of the equity interests (the "HalioDx Acquisition") of HalioDx SAS and 100% of the equity interest of HalioDx Inc., historically a wholly owned subsidiary of HalioDx SAS, (collectively referred to as “HalioDx”). HalioDx was a privately-held company providing immune-based diagnostic products and services. The consideration to acquire HalioDx was $320.9 million, comprised of $147.1 million in the form of 3.3 million shares of the Company’s common stock based on the Company's share price on the closing date, $4.2 million in liabilities, and the remainder in cash. The Company incurred $7.7 million of transaction costs related to the acquisition of HalioDx, which were recorded as general and administrative expense during the nine months ended September 30, 2021.

In connection with the HalioDx Acquisition, 11,031 unvested HalioDx free ordinary share awards, or free shares, were modified to provide the Company the right to purchase the vested free shares (call option) from the holders and the holders the right to sell the vested free shares to the Company (put option) from time to time through late 2023. As a result of the call and put options, the free shares are liability classified with an initial fair value of $5.1 million, based on the expected settlement amount. As the free shares require the holders to continue to provide services post-combination, the Company included $3.5 million, attributed to pre-combination services, in the purchase price and the remainder will be recorded in post-combination compensation expense, which will be recognized over the period the holders provide services to the Company.

Additionally, in connection with the HalioDx Acquisition, all of HalioDx's equity-classified options that were outstanding prior to the HalioDx Acquisition were terminated and cancelled at the acquisition date. The Company paid holders of vested options cash consideration of $0.4 million and as the payment is related to pre-combination services, the amount was included in the purchase price. The Company also committed to pay cash consideration of $1.5 million to holders of unvested options on the date the employee satisfies the original service requirement. As this payment requires continuing services and is forfeited if the holders' employment is terminated, the amount was considered nonrecurring post-combination compensation expense and will be recognized over the remaining service period.

As part of the agreement, the Company held back $16.8 million of the cash consideration, or the holdback, which will be payable to the founders of HalioDx based on their continuous employment with the Company. Fifty percent of the holdback will be placed in escrow on the founders' behalf on the first anniversary of the closing date and the remainder will be paid directly to the founders on the second anniversary. As this payment is dependent on the founders’ continuing employment and
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VERACYTE, INC.
Notes to Financial Statements