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


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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company 
  Emerging growth company 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No x
 
As of July 23, 2021, there were 67,473,870 shares of common stock, par value $0.001 per share, outstanding.




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VERACYTE, INC.
INDEX
 
 Page
No.
 
 





i

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PART I. — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements-(Unaudited)

VERACYTE, INC. 
Condensed Consolidated Balance Sheets 
(unaudited)
(In thousands, except share and per share amounts)
 
 June 30, 2021December 31, 2020
  (See Note 1)
Assets  
Current assets:  
Cash and cash equivalents$327,545 $349,364 
Accounts receivable31,864 18,461 
Supplies6,674 4,657 
Prepaid expenses and other current assets5,263 3,197 
Total current assets371,346 375,679 
Property and equipment, net11,813 8,990 
Right-of-use assets, operating lease14,559 7,843 
Intangible assets, net155,700 59,924 
Goodwill471,764 2,725 
Restricted cash749 603 
Other assets1,504 1,399 
Total assets$1,027,435 $457,163 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$8,472 $3,116 
Accrued liabilities20,756 11,705 
Current portion of deferred revenue566 371 
Current portion of acquisition-related contingent consideration3,375  
Current portion of operating lease liability2,936 1,589 
Total current liabilities36,105 16,781 
Long-term debt917 810 
Deferred revenue, net of current portion662 829 
Deferred tax liability773  
Acquisition-related contingent consideration, net of current portion4,467 7,594 
Operating lease liability, net of current portion13,334 9,917 
Total liabilities56,258 35,931 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, 0 shares issued and outstanding as of June 30, 2021 and December 31, 2020
  
Common stock, $0.001 par value; 125,000,000 shares authorized, 67,471,551 and 58,200,526 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively
67 58 
Additional paid-in capital1,303,610 702,768 
Accumulated deficit(332,500)(281,594)
Total stockholders’ equity971,177 421,232 
Total liabilities and stockholders’ equity$1,027,435 $457,163 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

1

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VERACYTE, INC.
 Condensed Consolidated Statements of Operations and Comprehensive Loss
 (Unaudited)
 (In thousands, except share and per share amounts)

 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
Revenue:    
Testing revenue$50,793 $15,212 $83,871 $42,203 
Product revenue2,688 1,713 5,747 5,122 
Biopharmaceutical revenue1,624 3,779 2,190 4,501 
Total Revenue55,105 20,704 91,808 51,826 
Operating expenses:
Cost of testing revenue15,589 6,471 26,421 17,039 
Cost of product revenue1,323 932 2,813 2,491 
Cost of biopharmaceutical revenue560 252 641 368 
Research and development6,249 4,169 11,585 8,576 
Selling and marketing19,662 10,701 35,958 28,285 
General and administrative15,473 7,957 61,755 15,770 
Intangible asset amortization3,723 1,273 5,524 2,548 
Total operating expenses62,579 31,755 144,697 75,077 
Loss from operations(7,474)(11,051)(52,889)(23,251)
Interest expense(63)(65)(116)(120)
Other (loss) income, net(1,653)91 (1,848)630 
Loss before income tax benefit(9,190)(11,025)(54,853)(22,741)
Income tax benefit(152) (3,947) 
Net loss and comprehensive loss$(9,038)$(11,025)$(50,906)$(22,741)
Net loss per common share, basic and diluted$(0.13)$(0.22)$(0.78)$(0.45)
Shares used to compute net loss per common share, basic and diluted67,316,065 50,212,123 65,334,890 50,002,377 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

2

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VERACYTE, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(In thousands)
 
 Common StockAdditional
Paid-in
Capital
Accumulated DeficitTotal
Stockholders'
Equity
 SharesAmount
Balance at March 31, 202167,236 $67 $1,297,626 $(323,462)$974,231 
Issuance of common stock on exercise of stock options and vesting of restricted stock units236 — 2,630 — 2,630 
Tax portion of vested restricted stock units— — (710)— (710)
Stock-based compensation expense (employee)— — 3,671 — 3,671 
Stock-based compensation expense (non-employee)— — 14 — 14 
Stock-based compensation expense (ESPP)— — 379 — 379 
Net loss and comprehensive loss— — — (9,038)(9,038)
Balance at June 30, 202167,472 $67 $1,303,610 $(332,500)$971,177 
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 upon exercise of stock options and vesting of restricted stock units675 — 5,436 — 5,436 
Issuance of common stock under employee stock purchase plan (ESPP)49 — 1,159 — 1,159 
Tax portion of vested restricted stock units— — (7,484)— (7,484)
Stock-based compensation expense (employee)— — 7,328 — 7,328 
Stock-based compensation expense (non-employee)— — 30 — 30 
Stock-based compensation expense (ESPP)— — 561 — 561 
Net loss and comprehensive loss— — — (50,906)(50,906)
Balance at June 30, 202167,472 $67 $1,303,610 $(332,500)$971,177 

 Common StockAdditional Paid-in
Capital
Accumulated
Deficit
Total Stockholders' Equity
 SharesAmount
Balance at March 31, 202050,000 $50 $488,773 $(258,401)$230,422 
Issuance of common stock on exercise of stock options and vesting of restricted stock units446 — 3,764 — 3,764 
Tax portion of vested restricted stock units— — (374)— (374)
Stock-based compensation expense (employee)— — 3,009 — 3,009 
Stock-based compensation expense (non-employee)— — 20 — 20 
Stock-based compensation expense (ESPP)— — 331 — 331 
Net loss and comprehensive loss— — — (11,025)(11,025)
Balance at June 30, 202050,446 $50 $495,523 $(269,426)$226,147 
Balance at December 31, 201949,625 $50 $486,090 $(246,685)$239,455 
Issuance of common stock upon exercise of stock options and vesting of restricted stock units760 — 4,745 — 4,745 
Issuance of common stock under ESPP61 — 1,101 — 1,101 
Tax portion of vested restricted stock units— — (2,678)— (2,678)
Stock-based compensation expense (employee)— — 5,560 — 5,560 
Stock-based compensation expense (non-employee)— — 20 — 20 
Stock-based compensation expense (ESPP)— — 685 — 685 
Net loss and comprehensive loss— — — (22,741)(22,741)
Balance at June 30, 202050,446 $50 $495,523 $(269,426)$226,147 
 
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)
 Six Months Ended June 30,
 20212020
Operating activities  
Net loss$(50,906)$(22,741)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization7,050 3,929 
Stock-based compensation7,919 6,265 
Benefit from income taxes(3,947) 
Interest on end-of-term debt obligation107 107 
Write-down of excess supplies 1,088 
Noncash lease expense885 469 
Revaluation of acquisition-related contingent consideration247 (140)
Effect of foreign currency on operations1,866  
Changes in operating assets and liabilities:
Accounts receivable(6,713)4,023 
Supplies(375)(1,323)
Prepaid expenses and other current assets(1,288)(664)
Other assets(30)166 
Operating lease liability(1,017)(682)
Accounts payable2,758 122 
Accrued liabilities and deferred revenue4,770 (4,343)
Net cash used in operating activities(38,674)(13,724)
Investing activities
Acquisition of business, net of cash acquired(574,411) 
Proceeds from sale of equity securities3,000  
Purchases of property and equipment(2,723)(1,314)
Net cash used in investing activities(574,134)(1,314)
Financing activities
Proceeds from the issuance of common stock in a public offering, net of issuance costs593,821  
Payment of taxes on vested restricted stock units(7,484)(2,678)
Proceeds from the exercise of common stock options and employee stock purchases6,595 5,849 
Net cash provided by financing activities592,932 3,171 
Decrease in cash, cash equivalents and restricted cash(19,876)(11,867)
Effect of foreign currency on cash, cash equivalents and restricted cash(1,797) 
Net decrease in cash, cash equivalents and restricted cash(21,673)(11,867)
Cash, cash equivalents and restricted cash at beginning of period349,967 159,920 
Cash, cash equivalents and restricted cash at end of period$328,294 $148,053 
Supplementary cash flow information:
Purchases of property and equipment included in accounts payable and accrued liability$1,019 $ 
Interest paid on debt$9 $3 
Cash, Cash Equivalents and Restricted Cash:
 June 30, 2021December 31, 2020
Cash and cash equivalents$327,545 $349,364 
Restricted cash749 603 
Total cash, cash equivalents and restricted cash$328,294 $349,967 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)

1. Organization, Description of Business and Summary of Significant Accounting Policies
 
Veracyte, Inc., or Veracyte, or the Company, is a global genomic diagnostics company that improves patient care by answering important clinical questions to inform diagnosis and treatment decisions throughout the patient journey. The company’s growing menu of tests leverage advances in genomic science and machine learning technology to change care for patients, enabling them to avoid risky, costly procedures and accelerate time to more appropriate treatment. In addition to making its genomic tests available in the United States through its central laboratories, the company believes its exclusive access to the nCounter Analysis System, a best-in-class diagnostics platform, positions the company to deliver its tests to patients worldwide through laboratories and hospitals that can perform them locally. With its acquisition of Decipher Biosciences, Inc. in March 2021, the company now has a presence in seven of the ten most common cancers impacting patients in the United States.

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 operations are based in South San Francisco, California and Austin, Texas. On March 12, 2021, the Company acquired Decipher Biosciences, Inc., or Decipher Biosciences, with operations based in San Diego, California.

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

Veracyte develops its genomic tests using advanced scientific methods, such as RNA whole-transcriptome analysis and machine learning, and then optimizes the assays and classifiers for the platform on which the test will be performed. Historically, the Company has utilized RNA whole-transcriptome analysis to perform its tests in its Clinical Laboratory Improvement Amendments of 1988, or CLIA, certified laboratories in South San Francisco and San Diego. With Veracyte’s exclusive global access to the nCounter Analysis System, the Company is positioned to deliver its tests to patients worldwide through laboratories and hospitals that can perform the tests locally.
Veracyte currently offers genomic tests in lung cancer; breast cancer; prostate cancer; thyroid cancer; and interstitial lung diseases, or ILD, including idiopathic pulmonary fibrosis, or IPF.

Lung Cancer - Percepta Genomic Sequencing Classifier. The Percepta classifier improves lung cancer diagnosis when diagnostic bronchoscopy results are inconclusive. This second-generation test was developed using the Company's RNA whole-transcriptome sequencing and machine learning platform and was commercially introduced in June 2019. The Percepta classifier identifies patients with lung nodules who are at low risk of cancer and may avoid further, invasive procedures as well as patients at high risk of cancer so they may obtain faster diagnosis and treatment. The test is built upon foundational "field of injury" science - through which genomic changes associated with lung cancer in current and former smokers can be identified with a simple brushing of a patient's airway - without the need to sample the often hard-to-reach nodule directly.

Breast Cancer - Prosigna Breast Cancer Prognostic Gene Signature Assay. The Prosigna test, acquired in December 2019 through the Company's strategic transaction with NanoString Technologies, Inc., or NanoString, uses advanced genomic technology to inform next steps for patients with early-stage breast cancer, based on the genomic make-up of their disease. The test uses a set of 50 genes known as the PAM50 gene signature and can provide a breast cancer patient and physician with a prognostic score that indicates the probability of cancer recurrence over ten years. Physicians use Prosigna to help guide therapeutic decisions so that patients receive a therapeutic intervention, such as chemotherapy, only if clinically warranted. Patient test results outside of the United States include intrinsic breast cancer subtypes to complement the risk-of-recurrence score.

Prostate Cancer – Decipher Prostate Biopsy and Radical Prostatectomy, or RP, Genomic Classifiers. The Decipher Prostate cancer tests, developed through RNA whole-transcriptome analysis, predict a patient’s risk of
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
progressing to metastatic disease, which helps physicians determine an appropriate treatment plan for patients. The Decipher Prostate Biopsy test is used with patients following a cancer diagnosis to inform whether the patient is a candidate for active surveillance, if they need monotherapy, or if they may benefit from multi-modality or intensified therapy. The Decipher Prostate RP test is used following surgery to guide decision-making regarding treatment timing following radical prostatectomy and whether patients undergoing salvage radiotherapy may benefit from the addition of hormone therapy.

Thyroid Cancer - Afirma Genomic Sequencing Classifier, or GSC, and Xpression Atlas. The Company's Afirma offerings comprise the Afirma GSC and Xpression Atlas, which help guide next steps for patients with potentially cancerous thyroid nodules. The offerings are intended to provide physicians with clinically actionable results from a single fine needle aspiration, or FNA biopsy. The Afirma GSC was developed with RNA whole-transcriptome sequencing and machine learning, and is used to identify patients with benign thyroid nodules among those with indeterminate cytopathology results in order to rule out unnecessary thyroid surgery.

The Afirma Xpression Atlas complements the Afirma GSC by providing genomic alteration content from the same FNA samples used in Afirma GSC testing to help physicians decide with greater confidence on the surgical or therapeutic pathway for their patients. The Company commercially launched the Afirma Xpression Atlas in 2018 and in April 2020 introduced an expanded version of the test, which includes significantly more genomic content.
ILD/IPF - Envisia Genomic Classifier. The Envisia classifier improves diagnosis of ILDs, including IPF, without the need for surgery. The test identifies the genomic pattern of usual interstitial pneumonia, or UIP, a hallmark of IPF, with high accuracy on patient samples that are obtained through transbronchial biopsy, a nonsurgical procedure that is commonly used in lung evaluation.

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 December 2019, the Company acquired from NanoString, Inc. the exclusive global diagnostics license to the nCounter Analysis System and the Prosigna Breast Cancer Prognostic Gene Signature Assay, which is commercially available, along with the LymphMark lymphoma subtyping assay, which is in development. Both tests are designed for use on the nCounter Analysis System. The Prosigna test kits and associated products are sold to laboratories and hospitals in global markets including the United States.

Veracyte’s whole-transcriptome approach, including RNA sequencing, also provides multiple opportunities for partnerships with biopharmaceutical and diagnostic testing companies. In developing its products, the Company has built or gained access to unique biorepositories, proprietary technology and bioinformatics that it believes are important to the development of new targeted therapies, determining clinical trial eligibility and guiding treatment selection. Additionally, the Company believes that the nCounter Analysis System provides an attractive distributed platform for other diagnostic companies seeking to make their genomic tests available to global markets.

On July 13, 2021, the Company entered into an agreement to acquire HalioDx SAS, a French société par actions simplifiée, or HalioDx. HalioDx is an immuno-oncology diagnostics company providing oncologists and drug development organizations with diagnostic products and services to guide cancer care and contribute to precision medicine. Upon the closing of the transaction, HalioDx will become a subsidiary of Veracyte. At closing, Veracyte will pay approximately €260 million in total consideration to HalioDx security holders, consisting of approximately €147 million in cash and up to approximately €113 million in stock, subject to customary purchase price adjustments. The acquisition is expected to close in the third quarter of 2021.
 
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 June 30, 2021 the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2021 and 2020, the condensed consolidated statements of
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
stockholders' equity for the three and six months ended June 30, 2021 and 2020, and the condensed consolidated statements of cash flows for the six months ended June 30, 2021 and 2020 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of its financial position, operating results, stockholders' equity and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2020 has been derived from audited financial statements. The results for the three and six months ended June 30, 2021 are not necessarily indicative of the results expected for the full year or any other period. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company operates in one segment.
 
The accompanying interim period condensed consolidated financial statements and related financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
 
Use of Estimates
 
The preparation of unaudited interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Items subject to such estimates include: revenue recognition; write-down of supplies; the useful lives of property and equipment; the recoverability of long-lived assets; the incremental borrowing rate for leases; accounting for acquisitions; the estimation of the fair value of intangible assets and contingent consideration; variable interest entity assessment; stock options; income tax uncertainties, including a valuation allowance for deferred tax assets; reserve on accounts receivable and contingencies. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions.

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

Concentrations of Credit Risk and Other Risks and Uncertainties
 
The worldwide spread of coronavirus, or COVID-19, has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, 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, revenues, supplies, goodwill and intangibles may be adversely affected. The Company considers the effects, to the extent knowable, of the COVID-19 pandemic in developing our estimates.
 
The majority of the Company’s cash and cash equivalents are deposited with one major financial institution in the United States. Deposits in this institution may exceed the amount of insurance provided on such deposits. The Company has not realized any losses on its deposits of cash and cash equivalents.
 
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
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
requirements on a timely basis, it could suffer delays in being able to deliver its diagnostic solutions, suffer a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results.
 
The Company is also subject to credit risk from its accounts receivable related to its sales. Credit risk for accounts receivable from testing revenue is incorporated in testing revenue accrual rates as the Company assesses historical collection rates and current developments to determine accrual rates and amounts the Company will ultimately collect. The Company generally does not perform evaluations of customers’ financial condition for testing revenue and generally does not require collateral. The Company assesses credit risk and the amount of accounts receivable the Company will ultimately collect for product, biopharmaceutical and collaboration revenue based on collection history, current developments and credit worthiness of the customer. The estimate of credit losses is not material at June 30, 2021.

Through June 30, 2021, most of the Company’s revenue has been derived from the sale of Afirma. To date, Afirma has been delivered primarily to physicians in the United States. 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 June 30,Six Months Ended June 30,
 2021202020212020
Medicare34 %18 %31 %23 %
UnitedHealthcare10 %10 %10 %10 %
 44 %28 %41 %33 %

 
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:
 
 June 30, 2021December 31, 2020
Medicare19 %13 %
UnitedHealthcare12 %12 %

Restricted Cash
 
The Company had deposits of $749,000 and $603,000 included in long-term assets as of June 30, 2021 and December 31, 2020, respectively, restricted from withdrawal and held by banks in the form of collateral for irrevocable standby letters of credit held as security for the Company's leases.
 
Revenue Recognition
 
Testing Revenue
 
The Company recognizes testing revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers, or ASC 606. Most of the Company’s revenue is generated from the provision of testing services. These services are completed upon the delivery of test results to the prescribing physician, at which time the Company bills for the services. The Company recognizes revenue related to billings based on estimates of the amount that will ultimately be realized. In determining the amount to accrue for a delivered test, the Company considers factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. These estimates require significant judgment by management. Actual results could differ from those estimates and assumptions.
 
During the first half of 2021, the Company changed its revenue estimates due to actual and anticipated cash collections for tests delivered in prior quarters and recognized additional revenue of $0.2 million and $0.4 million for the three and six months ended June 30, 2021, respectively. These adjustments resulted in decreases in the Company's loss from operations of $0.2 million and $0.4 million for the three and six months ended June 30, 2021, respectively. These adjustments resulted in no
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
change in basic and diluted net loss per share for the three months ended June 30, 2021 and a decrease in basic and diluted net loss per share of $0.01 for the six months ended June 30, 2021.
 
During the first half of 2020, the Company changed its revenue estimates due to actual and anticipated cash collections for tests delivered in prior quarters and recognized additional revenue of $0.9 million and $0.7 million for the three and six months ended June 30, 2020, respectively. These adjustments resulted in decreases in the Company's loss from operations of $0.9 million and $0.7 million and a decrease in basic and diluted net loss per share of $0.02 and $0.01 for the three and six months ended June 30, 2020, respectively.

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

In arrangements involving more than one performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from 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 of the related goods is transferred or services are performed. Consideration associated with at-risk substantive performance milestones is recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur. Should there be royalties, the Company utilizes the sales and usage-based royalty exception in arrangements that resulted from the license of intellectual property, recognizing revenues generated from royalties or profit sharing as the underlying sales occur.

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

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

Milestone Payments: At the inception of each arrangement that includes milestone payments (variable consideration), the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within the Company’s or the collaborative partner’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 its or the collaborative partner’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 collaboration revenues and earnings in the period of adjustment. Revisions to the Company’s estimate of the transaction price may also result in negative collaboration revenues and earnings in the period of adjustment.

Diagnostic Development Agreement with Johnson & Johnson

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

The agreements are considered to be within the scope of ASC 808 with respect to the milestone payments, as the parties are active participants and exposed to the risks and rewards of the collaborative activity. The delivery of data under the collaborative arrangement, which the Company believes is a distinct service for which Johnson & Johnson meets the definition of a customer is within the scope of ASC 606. Using the concepts of ASC 606, the Company has identified the delivery of data as its only performance obligation. The grant of the license is not distinct from other performance obligations as the customer receives benefit only when other performance obligations are met. The Company further determined that the transaction prices under the arrangements are the $18.0 million in payments which was allocated to the obligation to deliver data. The $13.0 million in future potential payments is considered variable consideration because the Company determined that the potential payments are contingent upon regulatory, development and commercialization milestones that are uncertain to occur and, as such, were not included in the transaction price, and will be recognized accordingly as each potential payment becomes probable.
 
For the three and six months ended June 30, 2021, the Company recognized $0.1 million and $0.3 million, respectively, of revenue under these contracts. For the three and six months ended June 30, 2020, the Company recognized $1.3 million and $1.6 million, respectively, of revenue under these contracts. Accounts receivable from Johnson & Johnson related to these contracts was $0.3 million at June 30, 2021 and zero at December 31, 2020. There was $1.1 million and $1.0 million of deferred revenue related to these agreements at June 30, 2021 and December 31, 2020, respectively.
 
Other Collaboration and Service Agreements
 
The Company has entered into agreements with biopharmaceutical companies and other diagnostic companies to provide them with data, development services and the right to develop tests on the nCounter Analysis System. For the three months ended June 30, 2021, the Company recognized biopharmaceutical revenue of $0.7 million for development services,
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
$0.4 million for the delivery of data and $0.4 million for the achievement of milestones. For the six months ended June 30, 2021, the Company recognized biopharmaceutical revenue of $1.1 million for development services, $0.4 million for the delivery of data and $0.4 million for the achievement of milestones. For the three months ended June 30, 2020, the Company recognized biopharmaceutical revenue of $1.0 million for the sale of commercial and development rights, $0.5 million for development services and $1.0 million for the achievement of milestones. For the six months ended June 30, 2020, the Company recognized biopharmaceutical revenue of $1.0 million for the sale of commercial and development rights, $0.9 million for development services and $1.0 million for the achievement of milestones. There was $0.1 million and zero of deferred revenue related to these agreements at June 30, 2021 and December 31, 2020, respectively. Accounts receivable from these contracts totaled $1.7 million at June 30, 2021 and $0.4 million at December 31, 2020.

Cost of Testing Revenue
 
The components of our cost of testing services are laboratory expenses, sample collection expenses, compensation expense, license fees and royalties, depreciation and amortization, other expenses such as equipment and laboratory supplies, and allocations of facility and information technology expenses. Costs associated with performing tests are expensed as the test is processed regardless of whether and when revenue is recognized with respect to that test.
 
Cost of Product Revenue
 
Cost of product revenue consists primarily of costs of purchasing instruments and diagnostic kits from third-party contract manufacturers, installation, service and packaging and delivery costs. In addition, cost of product includes royalty costs for licensed technologies included in the Company’s products and labor expenses. Cost of product revenue for instruments and diagnostic kits is recognized in the period the related revenue is recognized. Shipping and handling costs incurred for product shipments are included in cost of product in the condensed consolidated statements of operations and comprehensive loss.
 
Cost of Biopharmaceutical Revenue
 
Cost of biopharmaceutical revenue consists of costs of performing activities under arrangements that require the Company to perform research and development services on behalf of a customer pursuant to a biopharmaceutical service agreement. 

Recent Accounting Pronouncements
 
In December 2019, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. This ASU removes the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this ASU also improve consistency and simplify other areas of Topic 740 by clarifying and amending existing guidance. The revised guidance will be applied prospectively and became effective for the Company beginning January 1, 2021 and the adoption of ASU 2019-12 did not have a material impact on our condensed consolidated financial statements.
 
2. Net Loss Per Common Share
 
Basic net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. The following
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
outstanding common stock equivalents have been excluded from diluted net loss per common share because their inclusion would be anti-dilutive:
 
 Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
Shares of common stock subject to outstanding options3,842,026 4,823,917 3,893,173 4,792,022 
Employee stock purchase plan21,423 26,416 18,919 23,007 
Restricted stock units896,965 945,325 891,803 941,776 
Total common stock equivalents4,760,414 5,795,658 4,803,895 5,756,805 

3. Balance Sheet Components

Goodwill

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

Amounts
Balance as of December 31, 2020
$2,725 
Goodwill Acquired - Decipher Biosciences469,039 
Balance as of June 30, 2021
$471,764 

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):

 June 30, 2021December 31, 2020Weighted Average Amortization Period (Years)
 Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Percepta product technology$16,000 $(6,667)$9,333 $16,000 $(6,133)$9,867 15
Prosigna product technology4,120 (435)3,685 4,120 (298)3,822 15
Prosigna customer relationships2,430 (770)1,660 2,430 (526)1,904 5
nCounter Dx license46,880 (4,947)41,933 46,880 (3,386)43,494 15
LymphMark product technology990 (224)766 990 (153)837 7
Decipher product technology90,000 (2,734)87,266    10
Decipher trade names4,000 (243)3,757    5
Total finite-lived intangibles164,420 (16,020)148,400 70,420 (10,496)59,924 11.7
In-process research and development7,300 — 7,300 — — — 
Total intangible assets$171,720 $(16,020)$155,700 $70,420 $(10,496)$59,924 

Amortization of the finite-lived intangible assets is recognized on a straight-line basis. Amortization expense of $3.7 million and $1.3 million was recognized for the three months ended June 30, 2021 and 2020, respectively. Amortization expense of $5.5 million and $2.5 million was recognized for the six months ended June 30, 2021 and 2020, respectively.
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The estimated future aggregate amortization expense as of June 30, 2021 is as follows (in thousands of dollars):
Year Ending December 31,Amounts
2021 remainder of year$7,448 
202214,894 
202314,894 
202414,854 
202514,408 
Thereafter81,902 
Total$148,400 
 
Accrued Liabilities

Accrued liabilities consisted of the following (in thousands of dollars):
 
 June 30, 2021December 31, 2020
Accrued compensation expenses$12,600 $9,201 
Accrued other8,156 2,504 
Total accrued liabilities$20,756 $11,705 
 
4. Business Combination
 
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, comprised of approximately $550.5 million in the form of upfront cash consideration and the remainder in cash payable post-acquisition of which $43.8 million was paid prior to June 30, 2021. The Company incurred approximately $10.6 million of transaction costs related to the acquisition of Decipher Biosciences which were recorded as general and administrative expense during the three months ending March 31, 2021.

In connection with the acquisition, certain of Decipher Biosciences' equity awards that were outstanding and unvested prior to the acquisition became fully vested per the terms of the merger agreement. The acceleration of vesting required the Company to allocate the fair value of the historical Decipher Biosciences’ employee stock awards attributable to pre-combination service to the purchase price and the remaining amount was considered the Company's nonrecurring post-combination expense. In March 2021, the Company recognized nonrecurring post-combination expense related to the acceleration and cash settlement of unvested historical Decipher Biosciences’ employee stock awards of $25.1 million, all of which was recorded as general and administrative expense during the quarter ended March 31, 2021.

The Company included the financial results of Decipher Biosciences in its consolidated financial statements from the acquisition date, which contributed $18.9 million and $4.1 million of revenue and operating income, respectively, during the three months ended June 30, 2021 and $22.7 million and $4.9 million of revenue and operating income, respectively, during the six months ended June 30, 2021.

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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
The following table summarizes the purchase price and nonrecurring post-combination compensation expense recorded as a part of the acquisition (in thousands):

 Purchase PriceNonrecurring
Post-Combination Compensation Expense
Upfront cash consideration$550,515 $270 
Liabilities incurred 44,179 24,809 
Total $594,694 $25,079 

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the 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 receivable6,769 
Supplies inventory1,641 
Prepaids and other current assets778 
Property and equipment, net1,737 
Operating lease assets7,601 
Finite-lived intangible assets94,000 
Indefinite-lived intangible assets7,300 
Restricted cash146 
Other assets3,075 
Total identifiable assets acquired142,829 
Accounts payable(2,351)
Accrued liabilities(4,322)
Operating lease obligations (current)(1,241)
Operating lease obligations, net of current portion(4,540)
Deferred tax liability(4,368)
Net identifiable assets acquired126,007 
Goodwill469,039 
Total purchase price$595,046 
 
Based on the guidance provided in ASC 805, the Company accounted for the acquisition of Decipher Biosciences as a business combination in which the Company determined that Decipher Biosciences was a business which combines inputs and processes to create outputs, and substantially all of the fair value of gross assets acquired was not concentrated in a single identifiable asset or group of similar identifiable assets.

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



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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
During the three months ended June 30, 2021, the Company recorded certain measurement period adjustments due to new information becoming available pertaining to the valuation of accounts receivable and certain other assets. These adjustments were recorded as decreases to goodwill and did not impact the condensed consolidated statement of operations. One of these adjustments relates to cash collections of accounts receivable that existed as of the acquisition date exceeding the initial fair value of accounts receivable recorded on the acquisition date by $1.0 million.

The intangible assets acquired are two in-process research and development, or IPR&D, assets (Metastatic Hormone Sensitive Cancer and Castrate Resistant Cancer), developed technology, and trade names. Additionally, the Company identified certain off-market leases and an intangible asset of $1.8 million is included in operating lease assets which will be amortized over the remaining lease term.

The estimated fair value of the IPR&D is determined using the multi-period excess earnings method which calculates the present value of the estimated revenues and net cash flows derived from the IPR&D once the technologies are developed. The IPR&D is not amortized until it becomes commercially viable and placed in service. At the time when the intangible assets are placed in service the Company will determine a useful life.

The fair value of the finite-lived intangible assets was estimated as follows: (i) the developed technology of $90.0 million was based on a multi-period excess earnings method, and (ii) the trade names of $4.0 million was based on the relief from royalty method. The estimated useful life for the developed technology is 10 years, and the estimated useful life for the trade names is five years. The amortization expense related to finite-lived intangible assets is recorded within the intangible asset amortization financial statement line item.

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition resulted in the recognition of $469.0 million of goodwill which the Company believes consists primarily of expanded market and product opportunities, including new areas of genomic testing, as well as the potential expansion of the Company's product offerings in international markets. Furthermore, the acquisition of Decipher Biosciences bolsters the Company's presence to seven of the ten most common cancers impacting patients in the United States, which in turn enhances the Company’s overall prominence in the genomic testing arena. Goodwill created as a result of the acquisition is not deductible for tax purposes. The acquisition advances the Company's objective to improve the lives of patients through innovations in genomic technology tailored for diagnostic, prognostic, and treatment decisions related to urologic cancers.

We recorded an income tax benefit primarily due to net deferred tax liabilities assumed in connection with the acquisition, which provided a future source of income to support the realization of our deferred tax assets and resulted in a release of $3.5 million in the Company's valuation allowance.

Supplemental Pro Forma Information (unaudited)

The unaudited pro forma financial information in the table below summarizes the combined results of operations for Veracyte and Decipher as though the companies had been combined as of January 1, 2020. The pro forma amounts have been adjusted for:

day 1 expense related to the accelerated vesting of unvested legacy Decipher equity awards,
transaction expenses incurred by Decipher and us,
lease expense resulting from the fair value adjustments to the operating lease obligation and operating lease asset,
amortization expense resulting from the acquired intangible assets,
the elimination of historical interest expense incurred by Decipher on its debt and debt-like items, and
income tax benefits resulting from the deferred tax liabilities acquired.

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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
The following unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved as if the acquisition had taken place as of January 1, 2020 (in thousands):

Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Total revenues$55,105 $29,283 $103,785 $68,279 
Net Loss$(8,438)$(12,986)$(6,620)$(73,482)

Related Party Transactions

Members of Veracyte's board of directors, Dr. Tina S. Nova, Ph.D. and Dr. Robert S. Epstein, M.D., M.S., served on the board of directors of Decipher Biosciences prior to the acquisition of Decipher Biosciences, with Dr. Nova additionally serving as President and Chief Executive Officer of Decipher Biosciences. Pursuant to Veracyte's related party transactions policy, Dr. Nova and Dr. Epstein recused themselves from all discussions of its board of directors related to the acquisition, and the acquisition was approved by each of the non-interested members of the board of directors. In connection with the acquisition, certain Decipher Biosciences equity awards held by Dr. Nova and Dr. Epstein were fully-accelerated and certain incentive bonus payments were made to Dr. Nova pursuant to a management incentive plan established by the Decipher Biosciences board of directors, resulting in payments of approximately $26.5 million and $1.4 million to each of them, respectively. Dr. Nova resigned from Veracyte’s board of directors and now serves as Veracyte's General Manager, Thyroid and Urologic Cancers. Dr. Epstein continues to serve on Veracyte’s board of directors.

 
5. Fair Value Measurements
 
The Company records its financial assets and liabilities at fair value. The carrying amounts of certain financial instruments of the Company, including cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:
 
Level I: Inputs which include quoted prices in active markets for identical assets and liabilities;
Level II: Inputs other than Level I that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level III: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value of the Company’s financial assets includes money market funds and deposits for leases of the Company's facilities. Money market funds, included in cash and cash equivalents in the accompanying condensed consolidated balance sheets, were $238.8 million and $346.8 million as of June 30, 2021 and December 31, 2020, respectively, and are Level I assets as described above. The deposits for the leases, included in restricted cash in the accompanying condensed consolidated balance sheets, was $749,000 and $603,000 as of June 30, 2021 and December 31, 2020, respectively, and is a Level I asset as described above.
 
On December 3, 2019, the Company acquired from NanoString the exclusive global diagnostics license to the nCounter Analysis System, the Prosigna breast cancer prognostic gene signature assay, and the LymphMark lymphoma subtyping assay. Pursuant to the terms of the agreement, Veracyte paid NanoString $40.0 million in cash and $10.0 million in Veracyte common stock, and may pay up to an additional $10.0 million in cash, contingent upon the commercial launch of Veracyte diagnostic tests for use on the platform. This contingency was valued at $6.1 million as of the acquisition date and is remeasured to fair value at each reporting date until the contingent consideration is settled. As of June 30, 2021 and December 31, 2020, this
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
contingency was remeasured to $7.8 million and $7.6 million, respectively, with the corresponding changes included in general and administrative expense in the Company's condensed consolidated statements of operations and comprehensive loss. The fair value of the contingent consideration includes inputs that are not observable in the market and thus represent a Level III financial liability. The estimation of the fair value of the contingent consideration is based on the present value of the expected payments calculated by assessing the likelihood of when the related milestones would be achieved, discounted using the Company's estimated borrowing rate. These estimates form the basis for making judgments about the carrying value of the contingent consideration that are not readily apparent from other sources. Changes to the forecasts for the achievement of the milestones and the estimates of the borrowing rate can significantly affect the estimated fair value of the contingent consideration. As of June 30, 2021, the achievement of one of the milestones is forecasted to occur within the next 12 months.  As a result, $3.4 million of the contingent consideration is included in short term liabilities at June 30, 2021. As of June 30, 2021 and December 31, 2020, the Company calculated the estimated fair value of the milestones using the following significant unobservable inputs:
 
Value or Range (Weighted-Average)
Unobservable inputJune 30, 2021December 31, 2020
Discount rate5.66.9
Probability of achievement
70% - 100% (86%)
70% - 100% (86%)
 
6. Commitments and Contingencies
 
Operating Leases
 
The Company leases office and laboratory facilities in South San Francisco and San Diego, California and Austin, Texas under various non-cancelable lease agreements. The lease terms extend to January 2029 and contain extension of lease term and expansion options. The leases have a weighted average remaining lease term of 5.0 years as of June 30, 2021. The Company had deposits of $749,000 and $603,000 included in long-term assets as of June 30, 2021, and December 31, 2020, respectively, restricted from withdrawal and held by banks in the form of collateral for irrevocable standby letters of credit held as security for the leases.

The Company determined its operating lease liabilities using payments through their current expiration dates and a weighted average discount rate of 6.7% based on the rate that the Company would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments in a similar economic environment. Operating lease liabilities along with the associated right-of-use assets are disclosed in the accompanying condensed consolidated balance sheets. After the adoption of ASC 842, Leases, the Company classified its deferred rent for tenant improvements with its operating lease right-of-use assets on the consolidated balance sheets. In connection with the acquisition of Decipher Biosciences, the Company identified certain off-market rate leases and has estimated an intangible asset of $1.8 million which is included in operating lease assets and will be amortized over the remaining lease term. See Note 4 for more information on the acquisition of Decipher Biosciences.
 
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
Future minimum lease payments under non-cancelable operating leases as of June 30, 2021 are as follows (in thousands of dollars):
 
Year Ending December 31,Amounts
Remainder of 2021$1,841 
20223,770 
20233,880 
20243,991 
20254,103 
Thereafter1,661 
Total future minimum lease payments19,246 
Less: amount representing interest2,976 
Present value of future lease payments16,270 
Less: short-term lease liabilities2,936 
Long-term lease liabilities$13,334 
 
The Company recognizes operating lease expense on a straight-line basis over the non-cancelable lease period. The following table summarizes operating lease expense and cash paid for amounts included in the measurement of lease liabilities (in thousands of dollars):

Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Operating lease expense$902 $472 $1,477 $944 
Cash paid for amounts included in the measurement of lease liabilities$919 $586 $1,507 $1,157 
 
Contingencies
 
From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its condensed consolidated financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company believes there is no legal proceeding pending that could have, either individually or in the aggregate, a material adverse effect on the Company’s condensed consolidated financial statements.
 
7. Debt
 
Loan and Security Agreement
 
On November 3, 2017, the Company entered into a loan and security agreement, or Loan and Security Agreement, with Silicon Valley Bank. The Loan and Security Agreement allows the Company to borrow up to $35.0 million, with a $25.0 million advance term loan, or Term Loan Advance, and a revolving line of credit of up to $10.0 million, or Revolving Line of Credit. The Term Loan Advance was advanced upon the closing of the Loan and Security Agreement and was used to pay the outstanding balance of the Company’s existing long-term debt, which was canceled at that date. The Company had not drawn on the Revolving Line of Credit as of June 30, 2021. Borrowings under the Loan and Security Agreement mature on October 1, 2022. Amounts may be borrowed and repaid under the Revolving Line of Credit up until the earliest of full repayment or maturity of the Loan and Security Agreement, termination of the Loan and Security Agreement, or October 1, 2022.
 
The Term Loan Advance bears interest at a variable rate equal to (i) the thirty-day U.S. London Interbank Offer Rate, or LIBOR, plus (ii) 4.20%, with a minimum rate of 5.43% per annum. Principal amounts outstanding under the Revolving Line of Credit bear interest at a variable rate equal to (i) LIBOR plus (ii) 3.50%, with a minimum rate of 4.70% per annum.
 
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
The Company may prepay the outstanding principal amount under the Term Loan Advance plus accrued and unpaid interest and, if the Term Loan Advance is repaid in full, a prepayment premium of $250,000. In 2019 and 2020, the Company prepaid $24.9 million and $0.1 million, respectively, of the principal amount of the Term Loan Advance. These prepayments did not trigger any prepayment premium because they were partial, not full, repayments of the principal amount.

In addition, a final payment on the Term Loan Advance in the amount of $1.2 million is due upon the earlier of the maturity date of the Term Loan Advance or its payment in full. The Loan and Security Agreement contains customary representations, warranties, and events of default, as well as affirmative and negative covenants. As of June 30, 2021, the Company was in compliance with the loan covenants. The Company’s obligations under the Loan and Security Agreement are secured by substantially all of its assets (excluding intellectual property), subject to certain customary exceptions.
 
The debt obligation for borrowings made under the Loan and Security Agreement was as follows (in thousands of dollars):
 
 June 30, 2021December 31, 2020
Debt principal$ $ 
End-of-term debt obligation917 810 
Total debt obligation$917 $810 
 
As of June 30, 2021, the principal balance outstanding was one dollar. Future principal and end-of-term debt obligation payments under the Loan and Security Agreement are $1.2 million and due in 2022.  As of June 30, 2021 and December 31, 2020, the accrued interest payable under the Loan and Security Agreement was immaterial.
 
The end-of-term debt obligation accretes over the term of the Loan and Security Agreement until maturity and is included in interest expense in the Company's condensed consolidated statements of operations and comprehensive loss.
 
8. Stockholders’ Equity
 
Common Stock
 
The Company had reserved shares of common stock for issuance as follows:
 
 June 30, 2021December 31, 2020
Stock options and restricted stock units issued and outstanding4,620,239 4,867,303 
Stock options and restricted stock units available for grant under stock option plans4,961,688 3,061,589 
Common stock available for the Employee Stock Purchase Plan1,522,653 1,571,395 
Total11,104,580 9,500,287 

9. Income Taxes
 
The Company recorded an income tax benefit of approximately $0.2 million and $3.9 million for the three and six months ended June 30, 2021, and no income tax provision or benefit for the three and six months ended June 30, 2020. The income tax benefit for 2021 was primarily impacted by a discrete tax adjustment related to the release of certain valuation allowances on the Company's deferred tax assets upon recording of the deferred tax liabilities for the acquisition of Decipher Biosciences while 2020 had a full valuation allowance on all net deferred tax assets.

On March 27, 2020, and on December 27, 2020, respectively, the Coronavirus Aid, Relief, and Economic Security Act and the Consolidated Appropriations Act were enacted in response to the COVID-19 pandemic. The Company does not expect the provisions of such legislation to have a significant impact on the effective tax rate, the results of operations or the financial position of the Company.

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of financial condition and results of operations should be read together with the condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q, and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2020.
 
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "expects," "anticipates," "intends," "estimates," "plans," "believes," "continuing," "ongoing," and similar expressions are intended to identify forward-looking statements. These are statements that relate to future events and include, but are not limited to, the factors that may impact our financial results; our expectations regarding revenue; 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 economies; our expectations regarding the return to pre-COVID-19 volume and revenue levels; our ability to complete our acquisition of and successfully integrate HalioDx into our business; changes in our executive officers; our beliefs with respect to the optimization of our processes for the analysis of ribonucleic acid, or RNA, samples; our integration of Decipher Biosciences Inc. and the assets acquired from NanoString Technologies, Inc.; our ability to deploy the nCounter Analysis System successfully and run our tests on this platform worldwide; our collaboration with Johnson & Johnson Services, Inc.; our belief in the importance of maintaining libraries of clinical evidence; our expectations regarding the nasal swab classifier for early lung cancer detection, the Percepta Lung Cancer Atlas, the Envisia classifier on the nCounter system and the LymphMark lymphoma subtyping test; our expectations regarding our diagnostic company partnerships; our ability to have the targeted Atlas platform transferred to our pulmonology indications; our expectations regarding the Percepta Lung Cancer Atlas; our expectations regarding capital expenditures; our anticipated cash needs and our estimates regarding our capital requirements; the timing and success of our transition to a single platform for all of our classifiers and tests; our ability to maintain Medicare coverage for each of our tests; our need for additional financing; potential future sources of cash; our business strategy and our ability to execute our strategy; our ability to achieve and maintain reimbursement from third-party payers at acceptable levels and our expectations regarding the timing of reimbursement; the estimated size of the global markets for our tests; the estimated number of patients who are candidates for our test; the attributes and potential benefits of our tests and any future tests we may develop to patients, physicians and payers; the factors we believe drive demand for and reimbursement of our tests; our ability to sustain or increase demand for our tests; our intent to expand into other clinical areas; our ability to develop new tests, and the timeframes for development or commercialization; our ability to get our data and clinical studies accepted in peer-reviewed publications; our dependence on and the terms of our agreement with Thyroid Cytopathology Partners, or TCP, and on other strategic relationships, and the success of those relationships; our beliefs regarding our laboratory capacity; the potential for future clinical studies to contradict or undermine previously published clinical study results; the applicability of clinical results to actual outcomes; our expectations regarding our international expansion; the occurrence, timing, outcome or success of clinical trials or studies; the ability of our tests to impact treatment decisions; our beliefs regarding our competitive position; our compliance with federal, state and international regulations; the potential impact of regulation of our tests by the Food and Drug Administration, or FDA, or other regulatory bodies; the impact of new or changing policies, regulation or legislation, or of judicial decisions, on our business; the impact of seasonal fluctuations and economic conditions on our business; our belief that we have taken reasonable steps to protect our intellectual property; our belief that our intellectual property will develop and maintain our competitive position; the impact of accounting pronouncements and our critical accounting policies, judgments, estimates, models and assumptions on our financial results; and anticipated trends and challenges in our business and the markets in which we operate. We caution you that the foregoing list does not contain all of the forward-looking statements made in this report.
 
Forward-looking statements are based on our current plans and expectations and involve risks and uncertainties which could cause actual results to differ materially. These risks and uncertainties include, but are not limited to, those risks discussed in Part II, Item 1A of this report. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to update any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

When used in this report, all references to "Veracyte," the "company," "we," "our" and "us" refer to Veracyte, Inc.
 
Veracyte, the Veracyte logo, Decipher, Decipher GRID, Afirma, Percepta, Envisia, Prosigna, Lymphmark, “Know by Design” and “More about You” are registered trademarks of Veracyte, Inc. and its affiliates in the U.S. and selected countries. nCounter is the registered trademark of NanoString Technologies, Inc. in the U.S. and selected countries and used by Veracyte under license.
 
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This report contains statistical data and estimates that we obtained from industry publications and reports. These publications typically indicate that they have obtained their information from sources they believe to be reliable, but do not guarantee the accuracy and completeness of their information. Some data contained in this report is also based on our internal estimates.

Overview
 
We are a global genomic 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. Our growing menu of tests leverages advances in genomic science and machine learning technology to change care for patients, enabling them to avoid risky, costly procedures and accelerate time to more appropriate treatment. In addition to making our genomic tests available in the United States through our central laboratories, we believe our nCounter Analysis System is a best-in-class diagnostics platform that positions us to deliver our tests to patients worldwide through laboratories and hospitals that can perform them locally. With our acquisition of Decipher Biosciences in March 2021, we now have a presence in seven of the ten most common cancers in the United States.
We design our tests to address specific unmet needs in the diagnosis, prognosis and treatment of cancer and other diseases to thus improve patient outcomes, while delivering clinical and economic utility to physicians, payers and the healthcare system. We position our tests to integrate seamlessly into the way physicians currently evaluate patients in order to facilitate adoption.

We develop our genomic tests using advanced scientific methods, such as RNA whole-transcriptome analysis and machine learning, and then optimize the assays and classifiers for the platform on which the test will be performed. Historically, we have utilized RNA sequencing methods performed in our Clinical Laboratory Improvement Amendments of 1988, or CLIA, certified laboratory in South San Francisco, California. Through the Decipher Biosciences acquisition, we now also have access to an additional 28,000 square foot office and College of American Pathologists, or CAP, accredited and CLIA-certified laboratory in San Diego. We also expect to adapt select tests to be performed on the nCounter Analysis System for international distribution of our tests.

We currently offer seven commercialized genomic tests in six disease areas that we believe are changing diagnosis and patient care. All seven tests are available in the United States, six of which are currently reimbursed, and one is available internationally. These include the Afirma Genomic Sequencing Classifier, or GSC, for thyroid cancer; the Afirma Xpression Atlas, which provides information on the most common and emerging gene alterations associated with thyroid cancer, enabling physicians to confidently tailor surgical and treatment decisions at time of diagnosis; the Percepta GSC for lung cancer; the Envisia Genomic Classifier for interstitial lung diseases, including idiopathic pulmonary fibrosis; our prostate cancer genomic testing products, Decipher Prostate (Biopsy and RP); the Decipher Bladder genomic classifier for bladder cancer; and the Prosigna Breast Cancer Prognostic Gene Signature Assay for assessing risk of breast cancer distant recurrence. The Prosigna test is available for use on the nCounter platform in the United States and internationally.

We expect to continue expanding our offerings in our current indications, as well as potentially in others that we believe will benefit from our technology and approach. Our product development pipelines address what we believe to be significant market opportunities in early detection, diagnosis, staging/prognosis, therapy selection/surgery and disease monitoring across the aforementioned indications. We plan to commercially introduce multiple products in the near term: Our Percepta Nasal Swab test for early lu