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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, 2022
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 October 28, 2022, there were 71,752,896 shares of common stock, par value $0.001 per share, outstanding.




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VERACYTE, INC.
INDEX
 
 Page
No.
 
 


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VERACYTE, INC.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Quarterly Report on Form 10-Q other than statements of historical fact, including statements concerning our business strategy and plans, future operating results and financial position, as well as our objectives and expectations for our future operations, are forward-looking statements.

In some cases, you can identify forward-looking statements by such terminology as “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes, although not all forward-looking statements contain these words. Forward-looking statements include, but are not limited to, statements about:

our expectations regarding total revenue and total test volume;
our expectations with respect to our future research and development, general and administrative and selling and marketing expenses and our anticipated uses of our funds;
the impact of the COVID-19 pandemic on our business and the U.S. and global economy;
our ability to continue to successfully integrate HalioDx, Decipher Biosciences, and the assets acquired from NanoString Technologies, Inc. into our business;
our ability to deploy the nCounter Analysis System successfully and run our tests on this platform worldwide;
our expectations regarding our biopharma partnerships and agreements;
our anticipated cash needs and our estimates regarding our capital requirements and profitability;
the impact of the conflict in Ukraine, supply chain disruptions, inflation and foreign exchange fluctuations, and market volatility resulting from the above, on our business;
our ability to maintain Medicare and commercial payer coverage for each of our tests;
our sales, marketing and distribution capabilities and strategy;
our intellectual property position;
the impact of government laws and regulations; and
our competitive position.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations, prospects, and financial needs. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. We disclaim any intention or obligation to publicly update or revise any forward-looking statements for any reason or to conform such statements to actual results or revised expectations, except as required by law.


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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 par value amounts)
 
 September 30, 2022December 31, 2021
  (See Note 1)
Assets  
Current assets:  
Cash and cash equivalents$170,112 $173,197 
Short-term investments 3,964 
Accounts receivable40,068 41,461 
Supplies and inventory13,798 11,225 
Prepaid expenses and other current assets14,538 13,255 
Total current assets238,516 243,102 
Property and equipment, net17,237 15,098 
Right-of-use assets, operating leases13,885 16,043 
Intangible assets, net176,542 202,731 
Goodwill676,885 707,904 
Restricted cash749 749 
Other assets2,143 2,198 
Total assets$1,125,957 $1,187,825 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$11,114 $12,360 
Accrued liabilities32,137 39,475 
Current portion of long-term debt1,187 1,127 
Current portion of deferred revenue3,863 4,646 
Current portion of acquisition-related contingent consideration5,913 2,682 
Current portion of operating lease liabilities3,958 3,630 
Current portion of other liabilities180 231 
Total current liabilities58,352 64,151 
Deferred revenue, net of current portion 343 
Deferred tax liabilities4,342 5,592 
Acquisition-related contingent consideration, net of current portion2,411 5,722 
Operating lease liabilities, net of current portion11,527 14,096 
Other liabilities1,148 1,407 
Total liabilities77,780 91,311 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding as of September 30, 2022 and December 31, 2021
  
Common stock, $0.001 par value; 125,000,000 shares authorized, 71,741,517 and 71,123,108 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
72 71 
Additional paid-in capital1,492,044 1,468,683 
Accumulated deficit(389,873)(357,157)
Accumulated other comprehensive loss(54,066)(15,083)
Total stockholders’ equity1,048,177 1,096,514 
Total liabilities and stockholders’ equity$1,125,957 $1,187,825 
 
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,
 2022202120222021
Revenue:    
Testing revenue$64,577 $50,897 $180,275 $134,768 
Product revenue3,314 2,959 9,401 8,706 
Biopharmaceutical and other revenue7,701 6,514 26,563 8,704 
Total revenue75,592 60,370 216,239 152,178 
Operating expenses:
Cost of testing revenue19,816 16,073 55,923 42,494 
Cost of product revenue1,981 1,491 5,202 4,304 
Cost of biopharmaceutical and other revenue4,211 4,079 13,626 4,720 
Research and development10,773 8,006 29,316 19,591 
Selling and marketing25,678 21,670 73,433 57,628 
General and administrative17,600 20,749 58,310 82,504 
Intangible asset amortization5,213 4,983 16,090 10,507 
Total operating expenses85,272 77,051 251,900 221,748 
Loss from operations(9,680)(16,681)(35,661)(69,570)
Other income (loss), net805 1,202 2,675 (762)
Loss before income taxes(8,875)(15,479)(32,986)(70,332)
Income tax benefit(152)(1,350)(270)(5,297)
Net loss$(8,723)$(14,129)$(32,716)$(65,035)
Net loss per common share, basic and diluted$(0.12)$(0.20)$(0.46)$(0.97)
Shares used to compute net loss per common share, basic and diluted71,656,694 69,743,733 71,456,008 66,820,654 
 
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,
 2022202120222021
Net loss$(8,723)$(14,129)$(32,716)$(65,035)
Other comprehensive loss:
Change in currency translation adjustments(16,016)(8,140)(38,983)(8,140)
Net comprehensive loss$(24,739)$(22,269)$(71,699)$(73,175)
 
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, 202271,559 $72 $1,483,279 $(381,150)$(38,050)$1,064,151 
Issuance of common stock on exercise of stock options and vesting of restricted stock units110 — 623 — — 623 
Issuance of common stock under employee stock purchase plan (ESPP)73 — 1,633 — — 1,633 
Tax portion of vested restricted stock units— — (773)— — (773)
Stock-based compensation expense (employee)— — 6,815 — — 6,815 
Stock-based compensation expense (ESPP)— — 467 — — 467 
Net loss— — — (8,723)— (8,723)
Comprehensive loss— — — — (16,016)(16,016)
Balance at September 30, 202271,742 $72 $1,492,044 $(389,873)$(54,066)$1,048,177 
Balance at December 31, 202171,123 $71 $1,468,683 $(357,157)$(15,083)$1,096,514 
Issuance of common stock upon exercise of stock options and vesting of restricted stock units464 1 2,385 — — 2,386 
Issuance of common stock under ESPP155 — 3,748 — — 3,748 
Tax portion of vested restricted stock units— — (2,639)— — (2,639)
Stock-based compensation expense (employee)— — 18,459 — — 18,459 
Stock-based compensation expense (non-employee)— — 11 — — 11 
Stock-based compensation expense (ESPP)— — 1,397 — — 1,397 
Net loss— — — (32,716)— (32,716)
Comprehensive loss— — — — (38,983)(38,983)
Balance at September 30, 202271,742 $72 $1,492,044 $(389,873)$(54,066)$1,048,177 

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 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 ESPP32 — 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 ESPP81 — 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 Cash Flows 
(Unaudited) 
(In thousands)
 Nine Months Ended September 30,
 20222021
Operating activities  
Net loss$(32,716)$(65,035)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization19,372 13,189 
Loss on disposal of property and equipment72  
Stock-based compensation19,867 15,787 
Benefit from income taxes(270)(5,297)
Interest on end-of-term debt obligation161 161 
Noncash lease expense2,487 1,566 
Revaluation of acquisition-related contingent consideration(80)303 
Effect of foreign currency on operations1,563 1,601 
Impairment of intangible assets3,318  
Changes in operating assets and liabilities:
Accounts receivable(4,356)(6,285)
Supplies and inventory(2,841)4 
Prepaid expenses and other current assets(25)(1,905)
Other assets160 353 
Operating lease liabilities(2,570)(1,710)
Accounts payable(325)3,872 
Accrued liabilities and deferred revenue(6,026)3,329 
Net cash used in operating activities(2,209)(40,067)
Investing activities
Acquisition of Decipher Biosciences, net of cash acquired (574,411)
Acquisition of HalioDx, net of cash acquired (163,645)
Purchase of short-term investments(8,972) 
Proceeds from maturity of short-term investments12,696  
Proceeds from sale of equity securities 3,000 
Purchases of property and equipment(6,677)(4,535)
Net cash used in investing activities(2,953)(739,591)
Financing activities
Proceeds from the issuance of common stock in a public offering, net of issuance costs 593,821 
Payment of long-term debt(94) 
Payment of taxes on vested restricted stock units(2,639)(8,307)
Proceeds from the exercise of common stock options and employee stock purchases6,134 10,633 
Net cash provided by financing activities3,401 596,147 
Decrease in cash, cash equivalents and restricted cash(1,761)(183,511)
Effect of foreign currency on cash, cash equivalents and restricted cash(1,324)(1,678)
Net decrease in cash, cash equivalents and restricted cash(3,085)(185,189)
Cash, cash equivalents and restricted cash at beginning of period173,946 349,967 
Cash, cash equivalents and restricted cash at end of period$170,861 $164,778 
Supplementary cash flow information:
Purchases of property and equipment included in accounts payable and accrued liability$15 $31 
Interest paid on debt$ $9 
Cash paid for tax$430 $ 
Issuance of common stock for acquisition of HalioDx$ $147,089 
Cash, Cash Equivalents and Restricted Cash:
 September 30, 2022December 31, 2021
Cash and cash equivalents$170,112 $173,197 
Restricted cash749 749 
Total cash, cash equivalents and restricted cash$170,861 $173,946 
 
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 menu of tests leverage advances in genomic science and machine learning technology to influence 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 diagnostic access to the nCounter Analysis System positions the company to deliver tests to patients worldwide through laboratories and hospitals that can perform them locally.

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 South San Francisco, California, and it also has operations in San Diego, California; Austin, Texas; Richmond, Virginia; 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, and Richmond.

Veracyte’s foundational approach for its tests 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 their ability to influence care. This approach has enabled the Company to obtain Medicare reimbursement for many of its commercially available tests. 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 thyroid cancer (Afirma); prostate and bladder cancers (Decipher); breast cancer (Prosigna); lung cancer (Percepta); and interstitial lung diseases, or ILD, including idiopathic pulmonary fibrosis, or IPF (Envisia). The Company’s commercially available tests in each of these indications are covered by Medicare.

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 Technologies, Inc. or NanoString, 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.

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

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, 2022, the condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021, the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2022 and 2021, the condensed consolidated statements of stockholders' equity for the three and nine months ended September 30, 2022 and 2021, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2022 and 2021 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, 2021 has been derived from audited financial statements. The results for the three and nine months ended September 30, 2022
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
are not 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, 2021.
 
Reclassifications

Certain prior period balances have been reclassified to conform to current period presentation of the Company’s condensed consolidated financial statements and accompanying notes. Such reclassifications have no effect on previously reported results of operations, accumulated deficit, subtotals of operating, investing or financing cash flows or consolidated balance sheet totals; however, for the period December 31, 2021, the Company reclassified $4.0 million of prepaid expenses and other current assets to short-term investments in the condensed consolidated balance sheets.

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. Significant items subject to such estimates include: revenue recognition; 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 based compensation; income tax uncertainties, including a valuation allowance for deferred tax assets; credit related losses on investments; and 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.

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 predict. If the financial markets or the overall economy are impacted for an extended period, the Company’s liquidity, revenue, 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, the Company 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, 2022, most of the Company’s revenue has been derived from the sale of Decipher and Afirma testing. To date, Decipher and Afirma 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
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
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 other revenue based on collection history, current developments and credit worthiness of the customer. The estimate of credit losses is not material at September 30, 2022.

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,
 2022202120222021
Medicare31 %31 %31 %31 %
UnitedHealthcare10 %9 %10 %10 %
 41 %40 %41 %41 %

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, 2022December 31, 2021
Medicare14 %12 %
UnitedHealthcare10 %9 %

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.

Short-Term Investments
 
The Company's short-term investments consist of U.S. treasury securities and time deposits with a bank with maturities at the time of purchase that were between 90 days and one year. The Company classifies these investments as held-to-maturity debt securities, which are reported at amortized cost. Discounts or premiums from the purchase of the securities are recognized as a component of interest income in other income (loss), net in the condensed consolidated statements of operations. Investments are initially recorded net of an allowance for expected credit losses, if any, which are remeasured each period and any impairments are recognized as an expense. Unrealized gains and losses are not recognized in income. As of both September 30, 2022 and December 31, 2021, no allowances for expected credit losses had been recorded and there have been no impairment or credit losses on the Company's short term investments.

Restricted Cash
 
The Company had deposits of $0.7 million included in long-term assets as of both September 30, 2022 and December 31, 2021, 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.
 
Revenue Recognition
 
The Company recognizes revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers, or ASC 606. 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
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
obligations are considered satisfied once the Company has completed a service or transferred control of a product to the customer.

In arrangements involving more than one service or good, each required service or good is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the service or good either on its own or together with other resources that are readily available and (ii) the service or good 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 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.

Testing Revenue

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.
 
The Company has changed its revenue estimates due to actual and anticipated cash collections for tests delivered in prior quarters and recognized immaterial changes in revenue, loss from operations and basic and diluted net loss per share for the three and nine months ended September 30, 2022 and 2021.
 
Product Revenue

The Company's products consist of the Prosigna breast cancer assay, the nCounter Analysis System and related diagnostic kits. Product revenue from diagnostic kits is generally recognized upon shipment. Product revenue from instruments is generally recognized when the instrument is ready for use by the end customer. Shipping and handling costs incurred for product shipments are included in product revenue. Revenue is presented net of the taxes that are collected from customers and remitted to governmental authorities.

Biopharmaceutical and Other Revenue

The Company enters into arrangements for biopharmaceutical research and development, commercialization, contract manufacturing and development, and testing services, which are classified under biopharmaceutical and other revenue. Such arrangements may require the Company to deliver various rights, manufactured diagnostic test kits, services and/or samples, including intellectual property rights/licenses, biopharmaceutical research and development services, and/or commercialization services. The Company receives consideration in the form of upfront license fees; payments on delivery of data, test results or manufactured products; costs of service plus margin; and development and commercial performance milestone payments.
The Company develops 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. The estimation of the stand-alone selling price may include independent evidence of market price, forecasted revenue or costs, development timelines, discount rates, and probabilities of technical and regulatory success. The Company evaluates each performance obligation to determine if the obligation 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. 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. 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.

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
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
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 revenue and earnings in the period of adjustment. Revisions to the Company’s estimate of the transaction price may also result in negative revenue and earnings in the period of adjustment. One collaboration arrangement with milestone payments falls under the scope of ASC Topic 808, Collaborative Arrangements, or ASC 808. These milestone payments are recognized in the same manner as milestone payments from customers and are classified under biopharmaceutical and other revenue.

Accounts receivable from biopharmaceutical and other revenue was $7.7 million at September 30, 2022 and $11.6 million at December 31, 2021. There was $3.9 million and $5.0 million of deferred revenue related to these agreements at September 30, 2022 and December 31, 2021, respectively. Revenue included in biopharmaceutical and other revenue for the three and nine months ended September 30, 2022 and 2021 was as follows (in thousands of dollars):

 Three Months Ended September 30,Nine Months Ended September 30,
 2022202120222021
Biopharmaceutical revenue$6,368 $5,241 $20,820 $7,431 
Contract manufacturing and testing1,333 1,273 5,743 1,273 
Total$7,701 $6,514 $26,563 $8,704 

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, 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, and our internal labor expenses. In addition, cost of product includes royalty costs for licensed technologies included in the Company’s products. 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 biopharmaceutical research and development, commercialization, contract manufacturing and contract testing services on behalf of a customer. 

Pension Liability

The Company offers a defined benefit pension plan to certain non-U.S. employees of its Veracyte SAS subsidiary. As of September 30, 2022 and December 31, 2021, the total pension obligation was $0.9 million and $1.1 million, respectively, and is included in other liabilities on the condensed consolidated balance sheets.

Recent Accounting Pronouncements
 
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 2014-09, Revenue from Contracts with Customers (Topic 606). The update will generally result in an entity recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. The
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
new standard is effective on a prospective basis for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company does not expect to have a material impact on its consolidated financial statements and related disclosures from the adoption of this guidance.
 
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,
 2022202120222021
Shares of common stock subject to outstanding options4,043,274 3,668,179 3,902,116 3,817,351 
Employee stock purchase plan39,177 14,445 40,094 16,686 
Restricted stock units2,114,223 1,246,888 1,929,696 1,011,466 
Total common stock equivalents6,196,674 4,929,512 5,871,906 4,845,503 

3. Balance Sheet Components

Goodwill

Goodwill was $676.9 million and $707.9 million as of September 30, 2022 and December 31, 2021, respectively. The changes in the carrying amounts of goodwill during the nine months ended September 30, 2022 were due to foreign currency translation and measurement period adjustments. The Company has not recorded any impairment related to goodwill.

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, 2022December 31, 2021Weighted Average Remaining Amortization Period (Years)
 Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Percepta product technology$16,000 $(8,000)$8,000 $16,000 $(7,200)$8,800 7
Prosigna product technology4,120 (778)3,342 4,120 (572)3,548 11
Prosigna customer relationships2,430 (1,377)1,053 2,430 (1,013)1,417 1
nCounter Dx license46,880 (8,855)38,025 46,880 (6,511)40,369 11
LymphMark product technology990 (401)589 990 (295)695 4
Decipher product technology90,000 (13,984)76,016 90,000 (7,234)82,766 8
Decipher trade names4,000 (1,243)2,757 4,000 (643)3,357 3
HalioDx developed technology36,367 (4,500)31,867 45,640 (1,877)43,763 9
HalioDx customer relationships4,213 (861)3,352 4,870 (352)4,518 6
HalioDx customer backlog5,976 (1,735)4,241 6,908 (710)6,198 2
Total finite-lived intangibles210,976 (41,734)169,242 221,838 (26,407)195,431 8.9
In-process research and development7,300 — 7,300 7,300 — 7,300 
Total intangible assets$218,276 $(41,734)$176,542 $229,138 $(26,407)$202,731 

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During the three months ended June 30, 2022, the Company concluded it had a triggering event requiring assessment of impairment for certain of its long-lived assets in conjunction with management’s decision to cease commercialization efforts related to the Company’s stand-alone Immunoscore Colon Dx commercial offering. As a result, the Company reviewed the long-lived assets for impairment and recorded a $3.3 million impairment charge associated with its HalioDx Immunoscore Colon Dx developed technology finite-lived intangible asset. The impairment is recorded within general and administrative expense on the condensed consolidated statement of operations for the nine months ended September 30, 2022. The impairment was assessed under an income approach estimating forecasted discounted cash flows. This method is consistent with the methods the Company employed in prior periods to value other long-lived assets.

Amortization of the finite-lived intangible assets is recognized on a straight-line basis. Amortization expense of $5.2 million and $5.0 million was recognized for the three months ended September 30, 2022 and 2021, respectively, and expense of $16.1 million and $10.5 million was recognized for the nine months ended September 30, 2022 and 2021, respectively.
The estimated future aggregate amortization expense as of September 30, 2022 is as follows (in thousands of dollars):
Year Ending December 31,Amounts
2022 remainder of year$5,184 
202320,735 
202420,695 
202519,635 
202617,899 
Thereafter85,094 
Total$169,242 
 
Supplies and Inventory

As of September 30, 2022 and December 31, 2021, supplies and inventory consisted of $10.5 million and $8.2 million, respectively, of lab supplies and reagents consumed in the performance of testing services, and $3.3 million and $3.0 million, respectively, of inventory related to raw materials consumed in contract manufacturing process as well as finished diagnostic kits sourced from third parties related to product sales.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands of dollars):
 
 September 30, 2022December 31, 2021
Accrued compensation expenses$25,732 $30,792 
Accrued other6,405 8,683 
Total accrued liabilities$32,137 $39,475 
 
4. Business Combinations
 
HalioDx

On August 2, 2021, the Company acquired 100% of the equity interests, or 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. The HalioDx Acquisition gave the Company the capabilities and expertise to manufacture its own IVD test kits for use on the nCounter Analysis System. The acquisition also deepened the Company's scientific expertise and capabilities in the rapidly growing area of immuno-oncology, further strengthening its offerings for biopharmaceutical and other partners. The consideration to acquire HalioDx was $319.6 million, composed of $147.1 million in the form of 3.3 million shares of the
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
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 following table summarizes the fair values of assets acquired and liabilities assumed in the acquisition of HalioDx at the date of acquisition (in thousands):
 
Cash and cash equivalents$5,938 
Accounts receivable9,298 
Supplies inventory3,610 
Prepaids and other current assets7,045 
Property and equipment, net2,716 
Right-of-use assets, financing lease733 
Right-of-use assets, operating lease2,136 
Intangible assets60,303 
Other assets524 
Total identifiable assets acquired92,303 
Accounts payable(2,645)
Accrued liabilities(5,627)
Current portion of financing lease liability(247)
Current portion of operating lease liability(448)
Long-term debt(1,171)
Deferred revenue(3,250)
Financing lease liability, net of current portion(488)
Operating lease liability, net of current portion(1,687)
Deferred tax liability(6,946)
Net identifiable assets acquired69,794 
Goodwill249,846 
Total purchase price$319,640 
 
Since the acquisition, the Company has recorded certain measurement period adjustments due to new information becoming available pertaining to the valuation of accounts payable and certain other assets. These adjustments were recorded as net increases to goodwill totaling $0.2 million and did not impact the condensed consolidated statements of operations.

Decipher Biosciences

On March 12, 2021, the Company acquired 100% of the equity interests of Decipher Biosciences, a privately-held company developing diagnostic tests in urologic cancers, for approximately $594.7 million, or the Decipher Acquisition.

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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
The following table summarizes the fair values of assets acquired and liabilities assumed through the Company's acquisition of Decipher Biosciences at the date of acquisition (in thousands):
 
Cash and cash equivalents$19,782 
Accounts receivable7,562 
Supplies inventory1,641 
Prepaids and other current assets778 
Property and equipment, net1,737 
Right-of-use assets, operating lease7,601 
Finite-lived intangible assets94,000 
Indefinite-lived intangible assets7,300 
Restricted cash146 
Other assets