SEC Filing | Veracyte, Inc.

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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


☐			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 class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value, $0.001 per share

VCYT

The 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

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.
PART I. — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)						1
Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021						1
Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2022 and 2021						2
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Month Periods Ended September 30, 2022 and 2021						3
Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Month Periods Ended September 30, 2022 and 2021						4
Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2022 and 2021						6
Notes to Condensed Consolidated Financial Statements						7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						20
Item 3. Quantitative and Qualitative Disclosures About Market Risk						32
Item 4. Controls and Procedures						32
PART II. — OTHER INFORMATION
Item 1A. Risk Factors						34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						72
Item 3. Defaults Upon Senior Securities						72
Item 4. Mine Safety Disclosures						72
Item 5. Other Information						72
Item 6. Exhibits						72
SIGNATURES						74

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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, 2022		December 31, 2021
			(See Note 1)
Assets
Current assets:
Cash and cash equivalents	$	170,112	$	173,197
Short-term investments	—		3,964
Accounts receivable	40,068		41,461
Supplies and inventory	13,798		11,225
Prepaid expenses and other current assets	14,538		13,255
Total current assets	238,516		243,102
Property and equipment, net	17,237		15,098
Right-of-use assets, operating leases	13,885		16,043
Intangible assets, net	176,542		202,731
Goodwill	676,885		707,904
Restricted cash	749		749
Other assets	2,143		2,198
Total assets	$	1,125,957	$	1,187,825
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	11,114	$	12,360
Accrued liabilities	32,137		39,475
Current portion of long-term debt	1,187		1,127
Current portion of deferred revenue	3,863		4,646
Current portion of acquisition-related contingent consideration	5,913		2,682
Current portion of operating lease liabilities	3,958		3,630
Current portion of other liabilities	180		231
Total current liabilities	58,352		64,151
Deferred revenue, net of current portion	—		343
Deferred tax liabilities	4,342		5,592
Acquisition-related contingent consideration, net of current portion	2,411		5,722
Operating lease liabilities, net of current portion	11,527		14,096
Other liabilities	1,148		1,407
Total liabilities	77,780		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 capital	1,492,044		1,468,683
Accumulated deficit	(389,873)		(357,157)
Accumulated other comprehensive loss	(54,066)		(15,083)
Total stockholders’ equity	1,048,177		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,
	2022		2021		2022		2021
Revenue:
Testing revenue	$	64,577	$	50,897	$	180,275	$	134,768
Product revenue	3,314		2,959		9,401		8,706
Biopharmaceutical and other revenue	7,701		6,514		26,563		8,704
Total revenue	75,592		60,370		216,239		152,178
Operating expenses:
Cost of testing revenue	19,816		16,073		55,923		42,494
Cost of product revenue	1,981		1,491		5,202		4,304
Cost of biopharmaceutical and other revenue	4,211		4,079		13,626		4,720
Research and development	10,773		8,006		29,316		19,591
Selling and marketing	25,678		21,670		73,433		57,628
General and administrative	17,600		20,749		58,310		82,504
Intangible asset amortization	5,213		4,983		16,090		10,507
Total operating expenses	85,272		77,051		251,900		221,748
Loss from operations	(9,680)		(16,681)		(35,661)		(69,570)
Other income (loss), net	805		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 diluted	71,656,694		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,
	2022		2021		2022		2021
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 Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
	Shares	Amount
Balance at June 30, 2022	71,559	$	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 units	110	—		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, 2022	71,742	$	72	$	1,492,044	$	(389,873)	$	(54,066)	$	1,048,177

Balance at December 31, 2021	71,123	$	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 units	464	1		2,385		—		—		2,386
Issuance of common stock under ESPP	155	—		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, 2022	71,742	$	72	$	1,492,044	$	(389,873)	$	(54,066)	$	1,048,177

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	Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Stockholders' Equity
	Shares	Amount
Balance at June 30, 2021	67,472	$	67	$	1,303,610	$	(332,500)	$	—	$	971,177
Issuance of common stock for acquisition	3,347	3		147,086		—		—		147,089
Issuance of common stock on exercise of stock options and vesting of restricted stock units	181	1		2,843		—		—		2,844
Issuance of common stock under 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, 2021	71,032	$	71	$	1,461,778	$	(346,629)	$	(8,140)	$	1,107,080

Balance at December 31, 2020	58,201	$	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 acquisition	3,347	3		147,086		—		—		147,089
Issuance of common stock upon exercise of stock options and vesting of restricted stock units	856	1		8,279		—		—		8,280
Issuance of common stock under 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, 2021	71,032	$	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,
	2022		2021
Operating activities
Net loss	$	(32,716)	$	(65,035)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	19,372		13,189
Loss on disposal of property and equipment	72		—
Stock-based compensation	19,867		15,787
Benefit from income taxes	(270)		(5,297)
Interest on end-of-term debt obligation	161		161
Noncash lease expense	2,487		1,566
Revaluation of acquisition-related contingent consideration	(80)		303
Effect of foreign currency on operations	1,563		1,601
Impairment of intangible assets	3,318		—
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 assets	160		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 investments	12,696		—
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 purchases	6,134		10,633
Net cash provided by financing activities	3,401		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 period	173,946		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, 2022		December 31, 2021
Cash and cash equivalents	$	170,112	$	173,197
Restricted cash	749		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,
	2022		2021		2022		2021
Medicare	31	%	31	%	31	%	31	%
UnitedHealthcare	10	%	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, 2022		December 31, 2021
Medicare	14	%	12	%
UnitedHealthcare	10	%	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,
	2022		2021		2022		2021
Biopharmaceutical revenue	$	6,368	$	5,241	$	20,820	$	7,431
Contract manufacturing and testing	1,333		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,
	2022	2021	2022	2021
Shares of common stock subject to outstanding options	4,043,274	3,668,179	3,902,116	3,817,351
Employee stock purchase plan	39,177	14,445	40,094	16,686
Restricted stock units	2,114,223	1,246,888	1,929,696	1,011,466
Total common stock equivalents	6,196,674	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, 2022						December 31, 2021						Weighted Average Remaining Amortization Period (Years)
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Percepta product technology	$	16,000	$	(8,000)	$	8,000	$	16,000	$	(7,200)	$	8,800	7
Prosigna product technology	4,120		(778)		3,342		4,120		(572)		3,548		11
Prosigna customer relationships	2,430		(1,377)		1,053		2,430		(1,013)		1,417		1
nCounter Dx license	46,880		(8,855)		38,025		46,880		(6,511)		40,369		11
LymphMark product technology	990		(401)		589		990		(295)		695		4
Decipher product technology	90,000		(13,984)		76,016		90,000		(7,234)		82,766		8
Decipher trade names	4,000		(1,243)		2,757		4,000		(643)		3,357		3
HalioDx developed technology	36,367		(4,500)		31,867		45,640		(1,877)		43,763		9
HalioDx customer relationships	4,213		(861)		3,352		4,870		(352)		4,518		6
HalioDx customer backlog	5,976		(1,735)		4,241		6,908		(710)		6,198		2
Total finite-lived intangibles	210,976		(41,734)		169,242		221,838		(26,407)		195,431		8.9
In-process research and development	7,300		—		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
2023	20,735
2024	20,695
2025	19,635
2026	17,899
Thereafter	85,094
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, 2022		December 31, 2021
Accrued compensation expenses	$	25,732	$	30,792
Accrued other	6,405		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 receivable	9,298
Supplies inventory	3,610
Prepaids and other current assets	7,045
Property and equipment, net	2,716
Right-of-use assets, financing lease	733
Right-of-use assets, operating lease	2,136
Intangible assets	60,303
Other assets	524
Total identifiable assets acquired	92,303
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 acquired	69,794
Goodwill	249,846
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 receivable	7,562
Supplies inventory	1,641
Prepaids and other current assets	778
Property and equipment, net	1,737
Right-of-use assets, operating lease	7,601
Finite-lived intangible assets	94,000
Indefinite-lived intangible assets	7,300
Restricted cash	146
Other assets	3,075
Total identifiable assets acquired	143,622
Accounts payable	(2,351)
Accrued liabilities	(