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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 March 31, 2024
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 ¨
 


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 May 3, 2024, there were 76,448,070 shares of common stock, par value $0.001 per share, outstanding.




VERACYTE, INC.
INDEX
 
 Page
No.
 
 


i

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:

the factors that may impact our financial results;
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;
our expectations with respect to the impact of inflation, rising interest rates and foreign exchange fluctuations, as well as regional conflicts globally, energy and supply chain disruptions, and the resulting market volatility on our business;
our beliefs with respect to the optimization of our processes for the analysis of ribonucleic acid, or RNA, samples;
our beliefs with respect to importance of maintaining libraries of clinical evidence;
our expectations regarding the Percepta Nasal Swab classifier for early lung cancer detection;
our expectations regarding the addition of minimal residual detection capabilities to our diagnostic platform;
our expectations regarding the timing and success of our transition to offering more of our tests as in vitro diagnostic tests on multiple platforms worldwide;
our ability to continue to receive quality reagents and other raw materials from certain single source suppliers;
our ability to successfully integrate C2i Genomics, Inc., or C2i, HalioDx and Decipher Biosciences into our business and our ability to deploy the nCounter Analysis System successfully and run our tests on this and other platforms worldwide;
our expectations regarding our partnerships and agreements;
our expectations regarding capital expenditures, our anticipated cash needs and our estimates regarding our capital requirements and profitability;
our business strategy and our ability to execute on our strategy;
our ability to obtain and maintain Medicare, other government payer, and other commercial third party payer reimbursement at acceptable levels and our expectations regarding the timing of reimbursement;
our expectations with regard to the estimated number of patients eligible for our tests and the attributes and potential benefits of our tests and any future tests we may develop to patients, physicians, and payers;
our expectations on our ability to drive demand for and reimbursement of our tests; our sales, marketing and distribution capabilities and strategy;
our intellectual property position;
the impact of government laws and regulations, policies, guidance agency interpretations and judicial decisions; and
our beliefs in our competitive position.

We caution you that the foregoing list does not contain all of the forward-looking statements made in this report. 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
ii

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.


iii

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)
 
 March 31, 2024December 31, 2023
  (See Note 1)
Assets  
Current assets:  
Cash and cash equivalents$209,188 $216,454 
Accounts receivable46,665 40,378 
Supplies and inventory18,328 16,128 
Prepaid expenses and other current assets16,237 12,661 
Total current assets290,418 285,621 
Property, plant and equipment, net21,566 20,584 
Right-of-use assets, operating leases11,167 10,277 
Intangible assets, net116,348 88,593 
Goodwill753,853 702,984 
Restricted cash1,082 876 
Other assets5,639 5,971 
Total assets$1,200,073 $1,114,906 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$12,152 $12,943 
Accrued liabilities30,293 38,427 
Current portion of deferred revenue2,602 2,008 
Current portion of acquisition-related contingent consideration6,934 2,657 
Current portion of operating lease liabilities5,982 5,105 
Current portion of other liabilities89 101 
Total current liabilities58,052 61,241 
Deferred tax liabilities1,340 734 
Acquisition-related contingent consideration, net of current portion13,446 518 
Operating lease liabilities, net of current portion8,058 7,525 
Other liabilities528 786 
Total liabilities81,424 70,804 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding as of March 31, 2024 and December 31, 2023
  
Common stock, $0.001 par value; 125,000,000 shares authorized, 76,425,272 and 73,264,738 shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively
76 73 
Additional paid-in capital1,617,465 1,536,168 
Accumulated deficit(469,985)(468,121)
Accumulated other comprehensive loss(28,907)(24,018)
Total stockholders’ equity1,118,649 1,044,102 
Total liabilities and stockholders’ equity$1,200,073 $1,114,906 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
1

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

 Three Months Ended March 31,
 20242023
Revenue:  
Testing revenue$90,303 $72,396 
Product revenue3,537 3,892 
Biopharmaceutical and other revenue3,004 6,134 
Total revenue96,844 82,422 
Operating expenses:
Cost of testing revenue25,979 19,648 
Cost of product revenue2,644 2,162 
Cost of biopharmaceutical and other revenue2,838 4,419 
Research and development15,965 12,769 
Selling and marketing23,782 26,130 
General and administrative26,210 21,053 
Impairment of long-lived assets429 1,410 
Intangible asset amortization3,653 5,329 
Total operating expenses101,500 92,920 
Loss from operations(4,656)(10,498)
Other income, net2,748 2,407 
Loss before income taxes(1,908)(8,091)
Income tax benefit(44) 
Net loss$(1,864)$(8,091)
Net loss per common share, basic and diluted$(0.02)$(0.11)
Shares used to compute net loss per common share, basic and diluted74,759,789 72,175,457 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

2

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

 Three Months Ended March 31,
 20242023
Net loss$(1,864)$(8,091)
Other comprehensive income (loss):
Change in currency translation adjustments(4,889)4,480 
Net comprehensive loss$(6,753)$(3,611)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

VERACYTE, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(In thousands)
 
 Common StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal
Stockholders'
Equity
 SharesAmount
Balance at December 31, 202373,265 $73 $1,536,168 $(468,121)$(24,018)$1,044,102 
Issuance of common stock and options for acquisition2,698 3 74,142 — — 74,145 
Issuance of common stock upon exercise of stock options and vesting of restricted stock units382 — 1,271 — — 1,271 
Issuance of common stock under employee stock purchase plan (ESPP)80 — 1,697 — — 1,697 
Tax portion of vested restricted stock units— — (3,832)— — (3,832)
Stock-based compensation expense (employee)— — 7,728 — — 7,728 
Stock-based compensation expense (ESPP)— — 291 — — 291 
Net loss— — — (1,864)— (1,864)
Other comprehensive income— — — — (4,889)(4,889)
Balance at March 31, 202476,425 $76 $1,617,465 $(469,985)$(28,907)$1,118,649 

 Common StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal
Stockholders'
Equity
 SharesAmount
Balance at December 31, 202271,959 $72 $1,500,191 $(393,717)$(31,346)$1,075,200 
Issuance of common stock upon exercise of stock options and vesting of restricted stock units332 — 1,988 — — 1,988 
Issuance of common stock under ESPP92 — 1,974 — — 1,974 
Tax portion of vested restricted stock units— — (2,277)— — (2,277)
Stock-based compensation expense (employee)— — 7,612 — — 7,612 
Stock-based compensation expense (ESPP)— — 373 — — 373 
Net loss— — — (8,091)— (8,091)
Other comprehensive loss— — — — 4,480 4,480 
Balance at March 31, 202372,383 $72 $1,509,861 $(401,808)$(26,866)$1,081,259 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

VERACYTE, INC.  
Condensed Consolidated Statements of Cash Flows 
(Unaudited) 
(In thousands)
 Three Months Ended March 31,
 20242023
Operating activities  
Net loss$(1,864)$(8,091)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization5,590 6,670 
Loss on disposal of property, plant and equipment30 121 
Stock-based compensation8,019 7,985 
Deferred income taxes(120) 
Noncash lease expense1,139 903 
Revaluation of acquisition-related contingent consideration5 (485)
Effect of foreign currency on operations637 (224)
Impairment loss429 1,410 
Changes in operating assets and liabilities:
Accounts receivable(6,459)(1,302)
Supplies and inventory(2,303)1,055 
Prepaid expenses and other current assets(2,738)(3,064)
Other assets259 (491)
Operating lease liabilities(1,053)(950)
Accounts payable(1,544)2,012 
Accrued liabilities and deferred revenue(8,993)(7,721)
Net cash used in operating activities(8,966)(2,172)
Investing activities
Acquisition of C2i, net of cash acquired5,012  
Purchase of short-term investments (19,700)
Proceeds from sale of short-term investments 39,773 
Proceeds from maturity of short-term investments 5,000 
Purchases of property, plant and equipment(2,134)(993)
Net cash provided by investing activities2,878 24,080 
Financing activities
Payment of taxes on vested restricted stock units(3,832)(2,277)
Proceeds from the exercise of common stock options and employee stock purchases2,968 3,962 
Net cash (used in) provided by financing activities(864)1,685 
Increase (decrease) in cash, cash equivalents and restricted cash(6,952)23,593 
Effect of foreign currency on cash, cash equivalents and restricted cash(108)50 
Net increase (decrease) in cash, cash equivalents and restricted cash(7,060)23,643 
Cash, cash equivalents and restricted cash at beginning of period217,330 154,996 
Cash, cash equivalents and restricted cash at end of period$210,270 $178,639 
Supplementary cash flow information:
Purchases of property, plant and equipment included in accounts payable and accrued liability$1,754 $1,624 
Cash, Cash Equivalents and Restricted Cash:
 March 31, 2024December 31, 2023
Cash and cash equivalents$209,188 $216,454 
Restricted cash1,082 876 
Total cash, cash equivalents and restricted cash$210,270 $217,330 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

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 provides clinicians with tests to diagnose cancer. Veracyte's tests are used by clinicians for diagnostic, prognostic and treatment decisions.

Veracyte was incorporated in the state of Delaware on August 15, 2006, as Calderome, Inc. Calderome operated as an incubator until early 2008. On March 4, 2008, the Company changed its name to Veracyte, Inc. The Company’s headquarters are in South San Francisco, California, and it also has operations in San Diego, California; Austin, Texas; and Marseille, France.

The Company currently offers tests in thyroid cancer (Afirma); prostate cancer (Decipher Prostate); breast cancer (Prosigna); and bladder cancer (Decipher Bladder). The Company’s Percepta Nasal Swab test is being run in its Clinical Laboratory Improvement Amendments of 1988, or CLIA, certified lab in support of clinical studies and its test for lymphoma is in development as a companion diagnostic.

The Company serves global markets with two complementary models. In the United States, it offers laboratory developed tests, or LDTs, through its centralized, CLIA certified laboratories in South San Francisco and San Diego, California, supported by its cytopathology expertise in Austin, Texas. Additionally, primarily outside of the United States, the Company provides its Prosigna test to patients through distribution to laboratories and hospitals that can perform the tests locally as an IVD test that runs on the nCounter Analysis System.

In February 2024, the Company acquired C2i, a minimal residual disease, or MRD, detection company. Refer to Note 4 Business Combination for additional information.

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 March 31, 2024, the condensed consolidated statements of operations for the three months ended March 31, 2024 and 2023, the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2024 and 2023, the condensed consolidated statements of stockholders' equity for the three months ended March 31, 2024 and 2023, and the condensed consolidated statements of cash flows for the three months ended March 31, 2024 and 2023 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, 2023 has been derived from audited financial statements. The results for the three months ended March 31, 2024 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, 2023.

Reclassifications

Certain prior period balances have been reclassified to conform to current period presentation of the Company’s 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 three months ended March 31, 2023, the Company reclassified $1.4 million of impairment of long-term assets from the general and administrative caption in the condensed consolidated statements of operations to a separate caption within operating expenses.

6

VERACYTE, INC.
Notes to Financial Statements
(unaudited)
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, plant and equipment; the recoverability of long-lived assets; the incremental borrowing rates 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 majority of the Company’s cash and cash equivalents are deposited with two major financial institutions in the United States. Deposits in these institutions 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 Analysis system and some of the related service kits, are obtained from single-source suppliers. If these single-source suppliers fail to satisfy the Company’s requirements on a timely basis, or are unable to provide the Company with reagents that perform to specifications, 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 March 31, 2024, the Company has derived most of its revenue 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 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 March 31, 2024.

The Company’s total 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 March 31,
 20242023
Medicare31 %31 %
UnitedHealthcare9 %10 %
 40 %41 %

The Company's significant third-party payers in excess of 10% of total accounts receivable and their related accounts receivable balance as a percentage of total accounts receivable were as follows:
 
 March 31, 2024December 31, 2023
Medicare20 %20 %

7

VERACYTE, INC.
Notes to Financial Statements
(unaudited)
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.

Restricted Cash
 
The Company had deposits of $1.1 million and $0.9 million included in long-term assets as of March 31, 2024 and December 31, 2023, 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
 
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 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 recognizes revenue from the sale of tests performed for customers, including patients and institutions, at the time test results are reported to physicians. Most tests requested by customers are sold without a written agreement; however, the Company determines that an implied contract exists with its customers for whom a physician will order the test. The Company identifies each sale of its test to a customer as a single performance obligation. A stated contract price does not exist and the transaction price for each implied contract with a customer represents variable consideration. The Company estimates the variable consideration under the portfolio approach and considers the historical reimbursement data from third-party commercial and governmental payers and patients, as well as known or anticipated reimbursement trends not reflected in the historical data. The Company monitors the estimated amount to be collected in the portfolio at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required. Both the estimate and any subsequent revision contain uncertainty and require the use of significant judgment in the estimation of the variable consideration and application of the constraint for such variable consideration. The Company analyzes its actual cash collections over the expected reimbursement period and compares it with the estimated variable consideration for each payer group and any difference is recognized as an adjustment to estimated revenue after the expected reimbursement period, subject to assessment of the risk of future revenue reversal. For the three months ended March 31, 2024 and 2023, the Company recorded $3.0 million and $2.3 million as revenue, respectively, resulting from cash collections exceeding the estimated variable consideration related to tests reported in previous years, including revenue received from successful appeals of reimbursement denials, net of recoupments.
 
Product Revenue

The Company's products consist of the Prosigna breast cancer assay, the nCounter Analysis System, related diagnostic kits and services. Product revenue from diagnostic kits is generally recognized upon shipment. Product revenue from
8

VERACYTE, INC.
Notes to Financial Statements
(unaudited)
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 to license or provide access to its assets or services, including clinical and testing services, research and development, contract manufacturing and development, as well as other services, which are classified under biopharmaceutical and other revenue. Such arrangements may require the Company to deliver various rights, data, test results, manufactured diagnostic test kits, services and/or samples, including intellectual property rights/licenses and biopharmaceutical research and development 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 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 $4.0 million at March 31, 2024 and $6.0 million at December 31, 2023. There was $2.6 million and $2.0 million of deferred revenue related to these agreements at March 31, 2024 and December 31, 2023, respectively. Revenue included in biopharmaceutical and other revenue for the three months ended March 31, 2024 and 2023 was as follows (in thousands of dollars):

 Three Months Ended March 31,
 20242023
Biopharmaceutical revenue$953 $4,447 
Contract manufacturing and testing2,051 1,687 
Total$3,004 $6,134 

Cost of Testing Revenue
 
The components of the Company's 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.
9

VERACYTE, INC.
Notes to Financial Statements
(unaudited)
 
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 the Company's 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 license or provide access to its assets or services, including clinical and testing services, research and development, contract manufacturing and development, as well as other services.

Pension Liability

The Company offers a defined benefit pension plan to certain non-U.S. employees of its Veracyte SAS subsidiary. As of March 31, 2024 and December 31, 2023, the total pension obligation was $0.5 million and $0.8 million, respectively, and is included in other liabilities on the condensed consolidated balance sheets.

Recent Accounting Pronouncements
 
In December 2023, the Financial Accounting Standards Board issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740). This update requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid. This ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. This ASU will result in the required additional disclosures being included in the Company's consolidated financial statements, once adopted.

 
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 March 31,
 20242023
Shares of common stock subject to outstanding options3,627,695 3,767,086 
Employee stock purchase plan29,334 33,998 
Restricted stock units2,936,332 2,349,151 
Total common stock equivalents6,593,361 6,150,235 

10

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, 2023
$702,984 
Goodwill acquired - C2i55,974 
Effect of foreign currency translation on Goodwill acquired - HalioDx(5,105)
Balance as of March 31, 2024
$753,853 

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):

 March 31, 2024December 31, 2023Weighted Average Remaining Amortization Period (Years)
 Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Percepta product technology$16,000 $(9,600)$6,400 $16,000 $(9,333)$6,667 6
Prosigna product technology4,120 (1,190)2,930 4,120 (1,122)2,998 11
Prosigna customer relationships2,430 (2,106)324 2,430 (1,985)445 1
LymphMark product technology990 (613)377 990 (577)413 3
Decipher product technology90,000 (27,484)62,516 90,000 (25,234)64,766 7
Decipher trade names4,000 (2,443)1,557 4,000 (2,243)1,757 2
HalioDx developed technology1,404 (374)1,030 1,435 (346)1,089 7
HalioDx customer relationships2,699 (1,436)1,263 2,760 (1,331)1,429 2
HalioDx customer backlog4,166 (2,734)1,432 4,258 (2,529)1,729 1
C2i developed technology25,300 (281)25,019    15
Total finite-lived intangibles151,109 (48,261)102,848 125,993 (44,700)81,293 8.7
In-process research and development13,500 — 13,500 7,300 — 7,300 
Total intangible assets$164,609 $(48,261)$116,348 $133,293 $(44,700)$88,593 

Acquisition-related intangibles are generally finite-lived and are carried at cost less accumulated amortization. Amortization of the finite-lived intangible assets is recognized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized.

Amortization expense of $3.7 million and $5.3 million was recognized for the three months ended March 31, 2024 and 2023, respectively.

11

The estimated future aggregate amortization expense as of March 31, 2024 is as follows (in thousands of dollars):
Year Ending December 31,Amounts
2024 remainder of year$11,332 
202514,250 
202612,773 
202712,169 
202812,169 
Thereafter40,155 
Total$102,848 
 
Impairment of Long-Lived Assets

Impairment of long-lived assets for the three months ended March 31, 2024 and 2023 was $0.4 million and $1.4 million, respectively, of impairment of right-of-use and fixed assets in relation to exiting our Watertown and Richmond facilities.

Supplies and Inventory

As of March 31, 2024 and December 31, 2023, supplies and inventory consisted of $13.7 million and $12.2 million, respectively, of lab supplies and reagents consumed in the performance of testing services, and $4.6 million and $4.0 million, respectively, of inventory related to finished and semi-finished components used in the assembly of diagnostic kits related to product sales and raw materials consumed in the contract manufacturing process.

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands of dollars):
 
 March 31, 2024December 31, 2023
Accrued compensation expenses$16,948 $26,430 
Accrued other13,345 11,997 
Total accrued liabilities$30,293 $38,427 


4. Business Combination

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

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

12

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

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

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the preliminary fair values of assets acquired and liabilities assumed in the C2i Acquisition at the Closing Date (in thousands):
Amount
Assets acquired:
Cash and cash equivalents$13,677 
Prepaid expenses and other current assets998 
Property, plant and equipment, net277 
Right of use assets, operating leases1,277 
Intangible assets, net31,500 
Restricted cash188 
Total identifiable assets acquired47,917 
Accounts payable(59)
Accrued Liabilities(1,540)
Current portion of deferred revenue(94)
Current portion of operating lease liabilities(441)
Deferred tax liability(726)
Operating lease liabilities, net of current portion(836)
Net identifiable assets acquired44,221 
Goodwill55,974 
Total purchase price$100,195 

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

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

13

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

Fair ValueEstimated Useful LifeValuation Method
Intangible Assets Acquired:
Developed Technology$25,300 15Relief from royalty method
IPR&D assets6,200 IndefiniteMulti-period excess earnings method
Total intangible assets acquired$31,500 

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

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

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

Pro forma financial information (unaudited)

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

The unaudited supplemental pro forma financial information has been calculated after adjusting the results of the combined company to reflect incremental amortization expense resulting from the fair value adjustments for acquired intangible assets. Further, adjustments related to transaction costs and stock- based compensation expense are also reflected in the pro forma financial information in the table below:
For the three months ended March 31,
20242023
Total revenue$96,844 $82,422 
Net loss$(4,019)$(20,087)


5. Fair Value Measurements

The Company records certain of its financial assets and liabilities at fair value. The accounting guidance for fair value provides a framework for measuring fair value and clarifies the definition of fair value. 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
14

VERACYTE, INC.
Notes to Financial Statements
(unaudited)
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 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 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 $13.7 million and $1.4 million as of March 31, 2024 and December 31, 2023, respectively, and are Level I assets as described above. The deposits for the leases, included in restricted cash, were $1.1 million and $0.9 million as of March 31, 2024 and December 31, 2023, respectively, and are Level I assets as described above. There were no transfers between Levels 1, 2 or 3 for the three months ended March 31, 2024 and 2023.
 
As part of the Company’s agreement to acquire the exclusive global diagnostic license to the nCounter Analysis System, the Company may pay up to an additional $10.0 million in cash, contingent upon first achievement or occurrence, by or on behalf of the Company, of the commercial launch of the first, second and third diagnostic tests for use on the nCounter multiplex analysis system. 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, with the corresponding changes included in general and administrative expense in the Company's condensed consolidated statements of operations. As of March 31, 2024 and December 31, 2023, this contingency was remeasured to $3.2 million and $3.2 million, respectively. For the three months ended March 31, 2024, no expense was recorded. For the three months ended March 31, 2023, reversals of expense $0.5 million was recorded. As of March 31, 2024, the achievement of one of the milestones is forecasted to occur within the next 12 months. As a result, $2.7 million of the contingent consideration is included in short term liabilities at March 31, 2024. In addition, the contingent consideration related to the C2i Acquisition as discussed in Note 4, is dependent on the achievement of certain milestones and is payable in cash or shares of the Company’s common stock, at the Company’s election, of up to $25 million and was valued at $17.2 million. The fair value of the contingent consideration related to the C2i Acquisition will be remeasured to fair value at each reporting date until the contingent consideration is settled, with the corresponding changes included in general and administrative expense. As of March 31, 2024, the achievement of one of the milestones is forecasted to occur within the next 12 months. As a result, $4.3 million of the contingent consideration is included in short term liabilities at March 31, 2024. The fair value of contingent consideration includes inputs that are not observable in the market and thus represents 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 and estimating the Company's 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 borrowing rate can significantly affect the estimated fair value of the contingent consideration. As of March 31, 2024 and December 31, 2023, the Company calculated the estimated fair value of the milestones using the following significant unobservable inputs:
 
Value or Range (Weighted-Average)
Unobservable inputMarch 31, 2024December 31, 2023
Discount rate6.0%6.8%
Probability of achievement
0% - 90% (64%)
10% - 80% (69%)
 

6. Commitments and Contingencies
 
Operating Leases
 
The Company leases office and laboratory facilities in South San Francisco and San Diego, California; Austin, Texas; Marseille, France; Richmond, Virginia; and Watertown, Massachusetts, and leases certain equipment under various non-cancelable lease agreements. The lease terms extend to January 2029 and contain extension of lease terms and expansion options. The leases have a weighted average remaining lease term of 2.9 years as of March 31, 2024. The Company had deposits of $1.1 million and $0.9 million included in long-term assets as of March 31, 2024 and December 31, 2023, 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.

15

VERACYTE, INC.
Notes to Financial Statements
(unaudited)
The Company determined its operating lease liabilities using payments through their current expiration dates and a weighted average discount rate of 8.0% 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, or ASC 842, the Company classified its deferred rent for tenant improvements with its operating lease right-of-use assets on the consolidated balance sheets.
 
Future minimum lease payments under non-cancelable operating leases as of March 31, 2024 are as follows (in thousands of dollars):
 
Year Ending December 31,Amounts
Remainder of 2024$4,993 
20256,520 
20261,964 
2027781 
2028746 
Thereafter535 
Total future minimum lease payments15,539 
Less: amount representing interest1,499 
Present value of future lease payments14,040 
Less: short-term lease liabilities5,982 
Long-term lease liabilities$8,058 
 
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 March 31,
20242023
Operating lease expense$1,543 $1,123 
Cash paid for amounts included in the measurement of lease liabilities$1,629 $1,177 

The company has leased laboratory equipment under various financing leases. The total right-of-use assets and total financing lease liabilities for these financing leases were $0.1 million and $0.1 million, respectively, as of both March 31, 2024 and December 31, 2023, and are included in property, plant and equipment, net and other liabilities in the accompanying condensed consolidated balance sheets.

The Company’s wholly owned foreign subsidiary has entered into an arrangement under which it expects to sign a lease agreement for facilities which are being constructed in Marseille, France. The lease will commence upon completion of the construction of the office building at which time the Company will record a lease liability and a corresponding ROU asset. The initial term of the lease will be twelve years with annual rent of approximately $1.3 million, which is subject to change based on final construction and excludes common area maintenance costs.
 
Contingencies
 
From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business. The Company believes there is no litigation pending that could have, either individually or in the aggregate, a material impact on the Company's consolidated financial statements.
 

 
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7. Stockholders’ Equity
 
Common Stock
 
The Company had reserved shares of common stock for issuance as follows:
 
 March 31, 2024December 31, 2023
Stock options and restricted stock units issued and outstanding7,187,609 6,318,389 
Stock options and restricted stock units available for grant under stock option plans3,848,279 5,194,399 
Common stock available for the Employee Stock Purchase Plan1,109,722 1,189,513 
Total12,145,610 12,702,301 

8. Components of Other Income

Other income, net consists of the following (in thousands of dollars):

 Three Months Ended March 31,
 20242023
French research tax credits$570 $1,009 
Interest income2,695 1,189 
Interest expense (7)
Loss on currency revaluation(560)229 
Other43 (13)
 $2,748 $2,407 


9. Income Taxes
 
The Company recorded income tax benefit of $44 thousand for the three months ended March 31, 2024 and no income tax benefit for the three months ended March 31, 2023.

The Inflation Reduction Act of 2022 was signed into law August 16, 2022, and includes significant legislation addressing taxes, inflation, climate change and renewable energy incentives, and healthcare. Key tax provisions include a 15% corporate minimum tax, clean energy incentives, and a 1% excise tax on stock buybacks. The provisions of such legislation have not had any impact on the effective tax rate of the Company and the Company will continue to evaluate the tax effects should any provisions become applicable to the Company.
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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.

As discussed in the section titled “Special Note Regarding Forward Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth in the section titled “Risk Factors” under Part II, Item 1A.

When used in this report, all references to "Veracyte," the "company," "we," "our" and "us" refer to Veracyte, Inc., together with its consolidated subsidiaries, unless otherwise noted.
 
Veracyte, Afirma, Percepta, Envisia, Prosigna, Lymphmark, Decipher, GRID, HalioDx, TMExplore, Brightplex, Immunosign, C2i Genomics, C2intelligence, C2inform and the Veracyte logo are registered or pending trademarks of Veracyte, Inc. and its subsidiaries in the United States and selected countries. nCounter is the registered trademark of NanoString Technologies, Inc., or NanoString, in the United States and selected countries and used by Veracyte under license. Immunoscore is the registered trademark of Institut National de la Santé et de la Recherche Médicale, or Inserm, in the United States and selected countries and used by Veracyte under license.
 
Overview
 
We are a global diagnostics company that empowers clinicians with the high-value insights they need to guide and assure patients at pivotal moments in the race to diagnose and treat cancer. Our high-performing tests enable clinicians to make more confident diagnostic, prognostic and treatment decisions, helping patients avoid unnecessary procedures and interventions, and accelerating time to appropriate treatment, thereby improving outcomes for patients all over the world.
We currently offer tests in thyroid cancer (Afirma); prostate cancer (Decipher Prostate); breast cancer (Prosigna); and bladder cancer (Decipher Bladder). Our Percepta Nasal Swab test is being run in our CLIA lab in support of clinical studies and our test for lymphoma is in development as a companion diagnostic.
We serve global markets with two complementary models. In the United States, we offer LDTs through our centralized CLIA certified laboratories in South San Francisco and San Diego, California, supported by our cytopathology expertise in Austin, Texas. Additionally, primarily outside of the United States, we provide tests to patients through distribution to laboratories and hospitals that can perform the tests locally. Today, this includes our Prosigna test, and in the future, we intend to offer the Decipher Prostate and Percepta Nasal Swab tests as IVD tests. We believe our broad menu of advanced diagnostic tests, combined with our ability to deliver them globally, differentiates us in the diagnostics industry.
In February 2024, we acquired C2i, a MRD detection company, which aims to expand our role across the patient cancer journey, moving from providing early decision support to following the patient through treatment, where we will be able to help monitor the success of a therapeutic or surgical intervention, and determine the best course of action for each patient.

Macroeconomic Factors

Recent interest rate increases and inflation in the United States and other markets globally, as well as turmoil in the global banking and finance system, have heightened the risk of an economic downturn or recession and volatility and have resulted in recent volatility in the capital or credit markets in the United States and globally. Moreover, the continued fluctuation of the U.S. dollar compared to other currencies, has impacted and may continue to impact our results of operations. We intend to continue to monitor macroeconomic conditions closely and may determine to take certain financial or operational actions in response to such conditions as appropriate. In addition, regional conflicts like those between Russia and Ukraine have increased the risk of disruptions to energy supplies in Europe, which may impact our ability to manufacture tests or perform services from our facility in Marseille, France, and other conflicts may adversely impact our business and operating results. Finally, the ongoing conflict in the Middle East may disrupt our Israel business operations and employees that we acquired through the C2i Acquisition.

The extent of the macroeconomic factors on our future liquidity and operational performance will depend on certain developments, the impact on our customers' operations; the impact to our sales and renewal cycles; changes in central bank
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policies and interest rates; rates of inflation; and changes in foreign currency exchange rates. See "Risk Factors" for further discussion.

Factors Affecting Our Performance
 
Reported Total Test Volume
 
Our performance depends on the number of tests that we perform and report as completed in our CLIA-certified laboratories and Prosigna tests purchased by our customers. Factors impacting the number of tests that we report as completed include, but are not limited to:
 
the number of samples that we receive that meet the medical indication for each test performed;
the quantity and quality of the sample received;
receipt of the necessary documentation, such as physician order and patient consent, required to perform, bill and collect for our tests;
the patient's ability to pay or provide necessary insurance coverage for the tests performed;
the time it takes us or our customers to perform our tests and report the results, including as a result of supply chain challenges (including quality of reagents);
the seasonality inherent in our business, such as the impact of workdays per period, timing of industry conferences and timing of when patient deductibles are exceeded, which also impacts the reimbursement we receive from insurers; and
our ability to obtain prior authorization or meet other requirements instituted by payers, benefit managers, or regulators necessary to be paid for our tests.

Continued Adoption of and Reimbursement for our Products
 
Revenue growth depends on our ability to secure coverage decisions, achieve broader reimbursement from third-party payers, expand our base of prescribing physicians and increase our penetration in existing accounts. Because some payers consider our products experimental and investigational, we may not receive payment for tests and payments we receive may not be at acceptable levels. We expect our revenue growth to increase if more payers make a positive coverage decision and as payers enter into contracts with us, which should enhance our revenue and cash collections. Our sales teams are aligned under our general manager-based structure to focus on specific products and global markets. If we are unable to expand the base of prescribing physicians and penetration within these accounts at an acceptable rate, or if we are not able to execute our strategy for increasing reimbursement and associated collections, we may not be able to effectively increase our revenue. We expect to continue to see pressure from payers to limit the utilization of tests, generally, and we believe more payers are deploying cost containment tactics, such as pre-authorization, reduction of the payer portion of reimbursement and employing laboratory benefit managers to reduce utilization rates. Revenue growth also depends on our ability to secure reimbursement from government payers at a reimbursement rate that is consistent with past reimbursement rates.

How We Recognize Revenue

We recognize 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.  

Testing Revenue

We bill for testing services at the time of test completion as defined by the delivery of test results. We recognize revenue based on estimates of the amount that will ultimately be realized. In determining the amount to accrue for a delivered test, we consider factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and us, 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.

Generally, cash we receive is collected within 12 months of the date the test is billed. We cannot provide any assurance as to when, if ever, or to what extent, any of these amounts will be collected. Notwithstanding our efforts to obtain payment for these tests, payers may deny our claims, in whole or in part, and we may never receive payment for these tests.
 
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We bill list price regardless of contract rate, but only recognize revenue from amounts that we estimate are collectible and meet our revenue recognition criteria. Revenue may not be equal to the billed amount due to a number of factors that we consider when determining revenue accrual rates, including differences in reimbursement rates, the amounts of patient co-payments and co-insurance, the existence of secondary payers, claims denials and the amount we expect to ultimately collect. Finally, when we increase our list price, it will increase the cumulative amounts billed but may not positively impact accrued revenue. In addition, payer contracts generally include the right of offset and payers may offset payments prior to resolving disputes over tests performed.
 
Generally, we determine accrual rates by calculating an average of reimbursement from all payers for tests performed over a four-quarter period as it reduces the effects of temporary volatility and seasonality. The periods selected to determine accrual rates typically are at least six months old because it takes a significant period of time to collect from some payers. We may also determine accrual rates based on other factors such as coverage decisions, contracts, or more recent reimbursement data as appropriate.
 
The average test reimbursement rates will change over time due to a number of factors, including medical coverage decisions by payers, the effects of contracts signed with payers, changes in allowed amounts by payers, our ability to successfully win appeals for payment, and our ability to collect cash payments from third-party payers and individual patients. Historical average reimbursement is not necessarily indicative of future average reimbursement.
 
We incur expense for tests in the period in which the test is conducted and recognize revenue for tests in the period in which our revenue recognition criteria are met.

Product Revenue
 
Our products consist of the Prosigna breast cancer assay, the nCounter Analysis System, related diagnostic kits, and services. We recognize product revenue when control of the promised goods is transferred to our customers, in an amount that reflects the consideration expected to be received in exchange for those products. 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 we have transferred control of a product to the customer, meaning the customer has the ability to use and obtain the benefit of the product. We recognize 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 charged to our customers and 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
 
We enter into arrangements to license or provide access to our assets or services, including clinical and testing services, research and development, contract manufacturing and development, as well as other services. Such arrangements may require us to deliver various rights, data, services, manufactured diagnostic test kits, access and/or testing services to partner biopharmaceutical and other companies. The underlying terms of these arrangements generally provide for consideration paid to us in the form of nonrefundable fees; payments on delivery of data, test results or manufactured products; costs of service plus margin; performance milestone payments; expense reimbursements and possibly royalty and/or other payments. Net sales of data or other services to our customers are recognized in accordance with ASC 606 and are classified under biopharmaceutical and other revenue. Payments received that are not related to sales or services to a customer are recorded as offsets against research and development expense or cost of biopharmaceutical and other revenue in our consolidated statements of operations.

In arrangements involving more than one good or service delivered to a customer, each good or service is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from 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 our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis or using an adjusted market assessment approach if the selling price on a stand-alone basis is not available.

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

Timing of Our Research and Development Expenses
 
We deploy state-of-the-art and costly genomic technologies in our biomarker discovery experiments, and our spending on these technologies may vary substantially from quarter to quarter. We also spend a significant amount on activities to secure clinical trial results in support of our testing and product development portfolio and on-market tests, as well as clinical validation and utilization studies. The timing of these research and development activities is difficult to predict, as is the timing of clinical trial enrollments and sample acquisitions. If a substantial number of clinical samples are acquired in a given quarter or if a high-cost experiment is conducted in one quarter versus the next, the timing of these expenses can affect our financial results. We conduct clinical studies to validate our new products, as well as on-going clinical studies to further the published evidence to support our commercialized tests. As these studies are initiated, start-up costs for each site can be significant and concentrated in a specific quarter. Spending on research and development, for both experiments and studies, may vary significantly by quarter depending on the timing of these various expenses.

Financial Overview
 
Revenue
 
Through March 31, 2024, we derived most of our revenue from the sale of Decipher and Afirma tests, delivered primarily to physicians in the United States. We generally invoice third-party payers upon delivery of a patient report to the prescribing physician. As such, we take the assignment of benefits and the risk of cash collection from the third-party payer and individual patients. 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 March 31,
 20242023
Medicare31 %31 %
UnitedHealthcare%10 %
 40 %41 %
 
For tests performed, we recognize the related revenue upon delivery of a patient report to the prescribing physician based on the amount that we expect to ultimately receive. In determining the amount to accrue for a delivered test, we consider factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and us, payment as a percentage of agreed upon reimbursement rate (if applicable), amount paid per test and any current development or changes that could impact reimbursement. Upon ultimate collection, the amount received is compared to previous estimates and the amount accrued is adjusted accordingly. Our ability to increase our revenue will depend on our ability to penetrate the market, obtain positive coverage policies from additional third-party payers, obtain reimbursement and/or enter into contracts with additional third-party payers for our current and new tests, and increase reimbursement rates for tests performed. Finally, should the judgments underlying our estimated reimbursement change, our accrued revenue and financial results could be negatively impacted in future periods.
 
Cost of Testing Revenue
 
The components of our cost of testing revenue are sample collection kit costs, reagent 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 recorded as the test is processed regardless of whether and when revenue is recognized with respect to that test. As a result, our cost of testing revenue as a percentage of testing revenue may vary significantly from period to period because we may not recognize all revenue in the period in which the associated costs are incurred. We expect cost of testing revenue in absolute dollars to increase as the number of tests we perform increases. However, we expect that the cost per test will decrease over time due to leveraging fixed costs, efficiencies we may gain as test volume increases and process enhancements such as automation, and other cost reductions. As we introduce new tests, initially our cost of testing revenue will be high as we expect to run suboptimal batch sizes, run quality
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control batches, test batches, registry samples, and generally incur costs that may suppress or reduce gross margins. This will disproportionately increase our aggregate cost of testing revenue until we achieve efficiencies in processing these new tests.

Cost of Product Revenue

Our cost of product revenue consists primarily of costs of purchasing instruments, components for the manufacturing of diagnostic kits, service kits from third-party contract manufacturers, installation, warranty, service and packaging and delivery costs. In addition, cost of product revenue includes royalty costs for licensed technologies included in our products and labor expenses. As our Prosigna test kits are sold in various configurations with different number of tests, our product cost per test will vary based on the specific kit configuration purchased by customers.

Cost of Biopharmaceutical and Other Revenue
 
Our cost of biopharmaceutical and other revenue are the costs of performing activities under arrangements that require us to perform research and development, contract testing services, commercialization, and contract manufacturing and development. This expense is mainly composed of compensation, manufacturing and laboratory supplies, and pass-through costs.
 
Research and Development
 
Research and development expenses include expenses incurred to collect clinical samples and conduct clinical studies to develop and support our products and pipeline, as well as develop future technology. These expenses consist of compensation expenses, direct research and development expenses such as laboratory supplies and costs associated with setting up and conducting clinical studies at domestic and international sites, professional fees, depreciation and amortization, other miscellaneous expenses and allocation of facility and information technology expenses. We expense all research and development costs in the periods in which they are incurred. We incurred a majority of our research and development expenses in 2023 and in the three months ended March 31, 2024 in support of our early-stage products, including Percepta Nasal Swab, as well as the development of new IVD products and discovery. Going forward, we expect to incur significant expense as we invest in the continued development of our innovation engine, early-stage products including our MRD tests, required clinical studies and the development of current tests on multiple IVD platforms.
 
Selling and Marketing
 
Selling and marketing expenses consist of compensation expenses, direct marketing expenses, professional fees, other expenses such as travel and communications costs, as well as allocation of facility and information technology expenses. Our sales team of approximately 110 representatives is organized by business unit in the U.S., with separate teams calling on thyroid cancer, and urologic cancer physicians. The business units have dedicated marketing support, as well as a marketing operations team that serves the commercial organization broadly. Prosigna sales outside of the U.S. are led by country managers and sales teams that call on laboratories and breast cancer oncologists, and have dedicated marketing support.
 
General and Administrative
 
General and administrative expenses include compensation expenses for executive officers and administrative, billing and client service personnel, professional fees for legal and audit services, occupancy costs, depreciation and amortization, and other expenses such as information technology, acquisition related costs and miscellaneous expenses, offset by allocation of facility and information technology expenses to other functions. We expect general and administrative expenses to continue to increase as we build our infrastructure to scale revenue growth, and to decline as a percentage of revenue thereafter.
 
Intangible Asset Amortization
 
Our finite-lived intangible assets, acquired in business combinations, are being amortized over 4 to 15 years, using the straight-line method. Amortization expense is expected to be approximately $14 million per year through 2025 and decrease thereafter.
 
Other Income (Loss), Net
 
Other income (loss), net consists primarily of interest income from our cash held in interest bearing accounts, realized and unrealized gains and losses on foreign currency transactions, and French research tax credits. The French research tax credits
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(crédit d’impôt recherche, or CIR) are generated by our wholly owned subsidiary, Veracyte SAS, in connection with its research efforts performed in Marseille, France.

Foreign Currency Translation

The functional currency of our foreign subsidiaries, Veracyte SAS and C2i Genomics, Ltd., are the Euro and the Israeli Shekel, respectively. Assets and liabilities denominated in foreign currencies are translated to U.S. dollars using the exchange rates at the balance sheet date. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity. Revenue and expenses from our foreign subsidiaries are translated using the monthly average exchange rates in effect during the period in which the transactions occur. Foreign currency transaction gains and losses are recorded in other income (loss), net, on the condensed consolidated statements of operations.

Results of Operations
 
Comparison of the three months ended March 31, 2024 and 2023 (in thousands of dollars, except percentages and test volume):
 
 Three Months Ended March 31,
 20242023Change%
Revenue:    
Testing revenue$90,303 $72,396 $17,907 25%
Product revenue3,537 3,892 (355)(9)%
Biopharmaceutical and other revenue3,004 6,134 (3,130)(51)%
Total revenue96,844 82,422 14,422 17%
Operating expense:    
Cost of testing revenue25,979 19,648 6,331 32%
Cost of product revenue2,644 2,162 482 22%
Cost of biopharmaceutical and other revenue2,838 4,419 (1,581)(36)%
Research and development15,965 12,769 3,196 25%
Selling and marketing23,782 26,130 (2,348)(9)%
General and administrative26,210 21,053 5,157 24%
Impairment of long-lived assets429 1,410 (981)(70)%
Intangible asset amortization3,653 5,329 (1,676)(31)%
Total operating expenses101,500 92,920 8,580 9%
Loss from operations(4,656)(10,498)5,842 (56)%
Other income, net2,748 2,407 341 14%
Loss before income taxes(1,908)(8,091)6,183 (76)%
Income tax benefit(44)— (44)N/M
Net loss$(1,864)$(8,091)$6,227 (77)%
Other Operating Data:    
Diagnostic tests reported30,969 25,848 5,121 20%
Product tests sold2,455 2,940 (485)(16)%
Total test volume33,424 28,788 4,636 16%
Depreciation and amortization expense$5,590 $6,670 $(1,080)(16)%
Stock-based compensation expense$8,019 $8,101 $(82)(1)%
 
Revenue
 
Revenue increased $14.4 million for the three months ended March 31, 2024 compared to the same period in 2023. This was primarily due to a $17.9 million increase in testing revenue, partially offset by a $3.1 million decrease in our Biopharmaceutical and other revenue. The 25% growth in testing revenue was primarily driven by a 20% volume increase and a
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4% average selling price increase between our Afirma and Decipher products for the three months ended March 31, 2024. Our diagnostic test volumes include Afirma GSC tests, as well as Decipher Prostate and Bladder, Percepta GSC and Envisia tests that are commercially run at our CLIA labs.

Product revenue decreased $0.4 million for the three months ended March 31, 2024 compared to the same period in 2023, primarily driven by lower demand for product test kits primarily as a result of customer adoption reductions and delays.

Biopharmaceutical and other revenue decreased by $3.1 million for the three months ended March 31, 2024 driven primarily by the reduction of customer projects given overall spending constraints across the industry.

Cost of revenue
 
Comparison of the three months ended March 31, 2024 and 2023 is as follows (in thousands of dollars, except percentages):
 
 Three Months Ended March 31,
 20242023Change%
Cost of testing revenue:    
Laboratory costs$13,291 $10,362 $2,929 28 %
Sample collection costs3,057 2,515 542 22 %
Compensation expense5,215 4,247 968 23 %
License fees and royalties20 22 (2)(9)%
Depreciation and amortization427 309 118 38 %
Other expenses1,026 699 327 47 %
Allocations2,943 1,494 1,449 97 %
Total$25,979 $19,648 $6,331 32 %
Cost of product revenue:    
Product costs$1,263 $1,634 $(371)(23)%
License fees and royalties436 362 74 20 %
Depreciation and amortization225 43 182 423 %
Other expenses599 123 476 387 %
Allocations121 — 121 N/M
Total$2,644 $2,162 $482 22 %
Cost of biopharmaceutical and other revenue:    
Compensation expense$1,462 $2,286 $(824)(36)%
License fees and royalties149 21 128 610 %
Depreciation and amortization78 113 (35)(31)%
Other expenses722 1,896 (1,174)(62)%
Allocations427 103 324 315 %
Total$2,838 $4,419 $(1,581)(36)%
 
Cost of testing revenue increased $6.3 million, or 32%, for the three months ended March 31, 2024 compared to the same period in 2023. The increase in cost of testing revenue was due to increased volume in testing, higher staffing to support testing performance and the build out of infrastructure related to current and future growth expectations, primarily related to Afirma and Decipher Prostate tests.

Cost of product revenue is related to sales of Prosigna and nCounter Analysis Systems. Cost of product revenue increased $0.5 million, or 22%, for the three months ended March 31, 2024 compared to the same period in 2023, driven by increased overhead costs related to the build out of our Marseille, France facilities to support the manufacture of our IVD kits.

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Cost of biopharmaceutical and other revenue includes labor costs, laboratory supplies and pass-through expenses incurred on these projects. Cost of biopharmaceutical and other revenue decreased by $1.6 million driven by reductions of variable expenses related to projects.

Research and development
 
Comparison of the three months ended March 31, 2024 and 2023 is as follows (in thousands of dollars, except percentages):
 
 Three Months Ended March 31,
 20242023Change%
Research and development expense:    
Compensation expense$9,085 $7,301 $1,784 24 %
Direct research and development expense3,874 2,741 1,133 41 %
Depreciation and amortization239 163 76 47 %
Other expenses1,280 1,724 (444)(26)%
Allocations1,487 840 647 77 %
Total$15,965 $12,769 $3,196 25 %
 
Research and development expense increased $3.2 million, or 25%, for the three months ended March 31, 2024 compared to the same period in 2023. The increase is primarily driven by direct research and development expense related to our on-going clinical studies including, but not limited to, furthering the support and clinical utility evidence of our Percepta Nasal Swab test and urology products. In addition to clinical studies, the increase is partially driven by development costs related to our IVD and MRD strategies, as well as projects to enhance laboratory efficiencies.

Selling and marketing
 
Comparison of the three months ended March 31, 2024 and 2023 is as follows (in thousands of dollars, except percentages):
 
 Three Months Ended March 31,
 20242023Change%
Selling and marketing expense:    
Compensation expense$17,622 $19,671 $(2,049)(10)%
Direct marketing expense1,138 1,348 (210)(16)%
Other expenses3,414 3,577 (163)(5)%
Allocations1,608 1,534 74 %
Total$23,782 $26,130 $(2,348)(9)%
 
Selling and marketing expense decreased $2.3 million, or 9%, for the three months ended March 31, 2024 compared to the same period in 2023. The decrease in compensation expense was primarily due to a reversal of the stock-based compensation related to employee exits and reduced variable compensation, partially offset by severance costs associated with the decision to reduce the sales support for our Envisia product. Direct marketing expense decreased primarily due to timing of trade show events, which was partially offset by an increase in allocated expenses to support the growth of the Afirma and Decipher test volume.

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General and administrative
 
Comparison of the three months ended March 31, 2024 and 2023 is as follows (in thousands of dollars, except percentages):
 
 Three Months Ended March 31,
 20242023Change%
General and administrative expense:    
Compensation expense$17,759 $15,573 $2,186 14 %
Occupancy expenses2,553 1,437 1,116 78 %
Depreciation and amortization966 712 254 36 %
Other expenses11,518 7,302 4,216 58 %
Allocations(6,586)(3,971)(2,615)66 %
Total$26,210 $21,053 $5,157 24 %
 
General and administrative expense increased by $5.2 million for the three months ended March 31, 2024, compared to the same period in 2023. Compensation expense for the three months ended March 31, 2024 compared to the same period in 2023 increased primarily due to annual compensation increases and expenses related to the C2i Acquisition. Occupancy expenses increased primarily due to our expansion of our San Diego facilities footprint to support Decipher growth, and other expenses increased $4.2 million primarily related to expenses related to the C2i Acquisition. General and administrative expenses related to occupancy costs and information technology costs are allocated to general and administrative expense, selling and marketing expense, research and development expense, and cost of revenue based on the headcount and employee location.

Impairment of long-lived assets

Impairment of long-lived assets during the three months ended March 31, 2024 and 2023 was $0.4 million and $1.4 million, respectively, of impairment of right-of-use and fixed assets in relation to exiting our Watertown and Richmond facilities.

Other income, net

Other income, net, increased $0.3 million for the three months ended March 31, 2024 compared to the same period in 2023, primarily due to an increase of $1.5 million from interest income partially offset by a decrease of $0.4 million related to the French research tax credit and a decrease of $0.8 million due to foreign currency revaluation.

Income tax benefit

We recorded income tax benefit of $44 thousand for the three months ended March 31, 2024 and no income tax benefit for the three months ended March 31, 2023.

Given our current earnings, we believe that, within the next two years, sufficient positive evidence may become available to allow us to reach a conclusion that a portion of the valuation allowance recorded against the deferred tax assets held may be reversed. A reversal would result in an income tax benefit for the quarterly and annual period in which we determine to release the valuation allowance. However, the exact timing and amount of a valuation allowance release are subject to change on the basis of the level of profitability that we actually achieve.

Liquidity and Capital Resources
 
From inception through March 31, 2024, we have been financed primarily through net proceeds from the sale of our equity securities. We have incurred net losses since our inception. For the three months ended March 31, 2024, we had a net loss of $1.9 million, and we expect to incur additional losses for the remainder of 2024 and potentially in future years. As of March 31, 2024, we had an accumulated deficit of $470.0 million.

We believe our existing cash and cash equivalents of $209.2 million as of March 31, 2024, and cash flows generated by our revenue during the next 12 months will be sufficient to meet our anticipated cash requirements for at least the next 12
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months from the filing date of this report. We expect that our near- and longer-term liquidity requirements will continue to consist of costs to run our laboratories, research and development expenses, selling and marketing expenses, general and administrative expenses, working capital, capital expenditures, lease obligations, potential milestones associated with the C2i Acquisition, and general corporate expenses associated with the growth of our business. However, we may also use cash to acquire or invest in complementary businesses, technologies, services or products that would change our cash requirements. If we are not able to generate cash flows from our revenue to finance our cash requirements, we will need to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations or licensing arrangements. If we raise funds by issuing equity securities, dilution to stockholders could result. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings could impose significant restrictions on our operations. The incurrence of indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights, restrictions on our cash and other operating restrictions that could adversely affect our ability to conduct our business. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms. These agreements may require that we relinquish or license to a third-party on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves, or reserve certain opportunities for future potential arrangements when we might be able to achieve more favorable terms. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives, or forgo potential acquisitions or investments. In addition, we may have to work with a partner on one or more of our products or development programs, which could lower the economic value of those programs to us. Moreover, any instability in the global banking system may impact liquidity both in the short term and long term and may result in adverse impacts to our or our customers’ business, including in our customers’ ability to pay for our products.
 
Operating Leases

We lease office and laboratory facilities in South San Francisco and San Diego, California; Austin, Texas; Marseille, France; Richmond, Virginia; and Watertown, Massachusetts, and lease certain equipment under various non-cancelable lease agreements. The lease terms extend to January 2033 and contain extension of lease term and expansion options. As of March 31, 2024, the leases have a weighted average remaining lease term of 2.9 years and total future minimum lease payments of $15.5 million.

Veracyte SAS has signed a lease agreement for facilities which are under construction in Marseille, France. The lease will commence upon completion of the construction of the office building at which time we will record a lease liability and a corresponding ROU asset. The initial term of the lease will be twelve years with annual rent of approximately $1.3 million, which is subject to change based on final construction.

Acquisition-Related Contingent Consideration

C2i Acquisition Contingent Consideration

Pursuant to the Merger Agreement, we may pay up to an additional $25.0 million in cash or shares of our common stock, at our election, contingent upon the achievement of certain milestones. As of March 31, 2024, the achievement of one of the milestones contained in the Merger Agreement is forecasted to occur within the next 12 months, requiring payments totaling $5.0 million.

nCounter Analysis System Acquisition Contingent Consideration

As part of our agreement to acquire the exclusive global diagnostic license to the nCounter Analysis System, we may pay up to an additional $10.0 million in cash, contingent upon first achievement or occurrence, by us or on our behalf, of the commercial launch of the first, second and third diagnostic tests for use on the nCounter multiplex analysis system. As of March 31, 2024, the achievement of one of the milestones is forecasted to occur within the next 12 months, requiring payments totaling $3.5 million.

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Cash Flows
 
The following table summarizes our cash flows for the three months ended March 31, 2024 and 2023 (in thousands of dollars): 
 
 Three Months Ended March 31,
 20242023
Net cash used in operating activities$(8,966)$(2,172)
Net cash provided by investing activities2,878 24,080 
Net cash (used in) provided by financing activities(864)1,685 
 
Cash Flows from Operating Activities

Cash used in operating activities for the three months ended March 31, 2024 was $9.0 million. Our net loss of $1.9 million includes non-cash charges of $8.0 million of stock-based compensation expense, $5.6 million of depreciation and amortization, of which $3.7 million was related to intangible asset amortization, and the remainder was due to a non-cash lease expense of $1.1 million. Cash used as a result of changes in operating assets and liabilities was $22.8 million, primarily composed of a decrease in accrued liabilities and deferred revenue of $9.0 million, an increase in accounts receivable of $6.5 million, an increase in prepaids and other current assets of $2.7 million, an increase in supplies and inventory of $2.3 million, a decrease in accounts payable of $1.5 million, and a decrease in operating lease liability of $1.1 million, partially offset by a decrease in other assets of $0.3 million.
 
Cash used in operating activities for the three months ended March 31, 2023 was $2.2 million. The net loss of $8.1 million includes non-cash charges of $8.0 million of stock-based compensation expense, $6.7 million of depreciation and amortization, of which $5.3 million was related to intangible asset amortization, $1.4 million of impairment of right-of-use and fixed assets and non-cash lease expense of $0.9 million. Cash used as a result of changes in operating assets and liabilities was $10.5 million, primarily comprising a decrease in accrued liabilities and deferred revenue of $7.7 million, an increase in prepaids and other current assets of $3.1 million, an increase in accounts payable of $2.0 million, an increase in accounts receivable of $1.3 million, a decrease in supplies and inventory of $1.1 million, a decrease in operating lease liability of $1.0 million and a $0.5 million impact from other working capital accounts.
 
Cash Flows from Investing Activities
 
Cash provided by investing activities for the three months ended March 31, 2024 was $2.9 million, consisting of $5.0 million net cash acquired from C2i excluding post-close transactions costs, partially offset by $2.1 million used in the purchase of property, plant and equipment.
 
Cash provided by investing activities, for the three months ended March 31, 2023, was $24.1 million, consisting of $44.8 million generated from the sale and maturity of short-term investments, partially offset by $19.7 million used in the purchase of short-term investments and $1.0 million used in the purchase of property, plant and equipment.
 
Cash Flows from Financing Activities
 
Cash used in financing activities for the three months ended March 31, 2024 was $0.9 million, consisting of $3.8 million in tax payments during the period related to the vesting of restricted stock units granted to employees, partially offset by $3.0 million in proceeds from the exercise of options to purchase our common stock and the purchase of stock under our Employee Stock Purchase Plan, or ESPP.
 
Cash provided by financing activities for the three months ended March 31, 2023, was $1.7 million, consisting of $4.0 million in proceeds from the exercise of options to purchase our common stock and the purchase of stock under our ESPP, partially offset by $2.3 million in tax payments during the period related to the vesting of restricted stock units granted to employees.

Recent Accounting Pronouncements
 
In December 2023, the Financial Accounting Standards Board issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740). The update requires disaggregated information about a reporting entity’s effective tax rate
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reconciliation as well as additional information on income taxes paid. This ASU is effective on a prospective basis for annual periods beginning after December 15, 2024. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. We expect this ASU will result in the required additional disclosures being included in our consolidated financial statements, once adopted.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of the condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed in our Annual Report on Form 10-K for the year ended December 31, 2023, or Annual Report, which was filed with the Securities and Exchange Commission, or the SEC, on February 29, 2024 are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in our Annual Report.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rates. We had cash and cash equivalents of $209.2 million as of March 31, 2024 which consisted of bank deposits and money market funds. Such interest-bearing instruments carry a degree of risk; however, a hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our condensed consolidated financial statements.

Foreign Currency Risk

As of March 31, 2024 we held $3.2 million of bank deposits denominated in Euros. Such Euro denominated deposits carry a degree of risk from changes in currency exchange rates as the gains or losses from changes in exchange rates are included in our net loss and comprehensive loss. As of March 31, 2024 a hypothetical 10% appreciation or depreciation of the U.S. dollar relative to the Euro would not have had a material impact on our condensed consolidated financial statements.

Inflation Risk

We are facing inflation headwinds in compensation, travel, supply and inventory costs. However, we do not believe that inflation has had a material effect on our business, financial condition, or operating results to date.


ITEM 4.  CONTROLS AND PROCEDURES
 
(a)Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon
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certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
 
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
 
(b)Changes in Internal Control over Financial Reporting

We continuously seek to improve the efficiency and effectiveness of our internal controls. This results in refinements to processes throughout our Company. On February 5, 2024, we closed the C2i Acquisition and we are in the process of incorporating C2i into our evaluation of internal control over financial reporting. Other than the C2i Acquisition there were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation identified above that occurred during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. — OTHER INFORMATION

ITEM 1A.  RISK FACTORS
 
Summary of Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully review the “Risk Factors” section before you invest in shares of our common stock. Listed below are some of the more significant risks relating to an investment in our common stock.

Risks Related to Our Business

We have a history of losses, and we expect to incur net losses for the foreseeable future and may never achieve or sustain profitability.
Our financial results currently depend mainly on sales of our Afirma and Decipher Prostate tests, and we will need to generate sufficient revenue from these and our other diagnostic tests to grow our business.
If we are unable to grow sales of our portfolio of tests or products, or we are unable to launch or commercialize our new tests, our business may suffer.
We depend on a few payers for a significant portion of our revenue; if one or more significant payers stops providing reimbursement or decreases the amount of reimbursement for our tests our revenue could decline.
If payers do not provide reimbursement, rescind or modify their reimbursement policies, delay payments for our tests, recoup past payments, or if we are unable to successfully negotiate additional reimbursement contracts, our commercial success could be compromised.
We may experience limits on our revenue if physicians decide not to order our tests or if patients decide not to use our tests as a result of increased costs, fees or changing insurer policies.
If we fail to comply with federal, state and foreign licensing requirements, we could lose the ability to perform our tests or experience disruptions to our business.
Our quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts for various reasons, including in response to the way we recognize revenue and/or the amount of cash we generate, which may cause our stock price to fluctuate or decline.
If our general strategy of seeking growth through acquisitions and collaborations is not successful, or if we do not successfully integrate companies or assets that we acquire into our business, our prospects and financial condition will suffer.
Our future success and international growth depend, in part, on our ability to adapt and manufacture select tests to be performed on multiple IVD platforms.
The revenue that we are expecting in our biopharma and other services business may not transpire.
We rely on sole suppliers for some of the reagents, equipment, and other materials used to perform or develop our tests, as well as certain sole service providers, and we may not be able to find replacements or transition to alternative suppliers or service providers, which may materially impact our ability to generate revenue.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
If we are unable to support demand for our tests, services or products, our business could suffer.
Changes in healthcare policy, including legislation reforming the U.S. healthcare system, may have a material adverse effect on our financial condition and operations.
Because of Medicare billing rules, we may not receive reimbursement for all tests provided to Medicare patients.
FDA or foreign authorities regulation of those of our tests that they do not currently regulate could result in Veracyte incurring substantial costs and delays associated with trying to obtain premarket clearance, approval or certification.
Obtaining marketing authorization or certification by the FDA and foreign regulatory authorities or notified regulatory bodies for our diagnostic tests will take significant time and require significant research, development and clinical study expenditures and ultimately may not succeed.
If we are unable to compete successfully, we may be unable to increase or sustain our revenue and/or achieve profitability.
We depend on our senior management team, and the loss of one or more of our executive officers, or the inability to attract and retain highly-skilled employees or other key personnel, could adversely affect our business.
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Billing for our diagnostic tests is complex, and we must dedicate substantial time and resources to the billing process in order to collect cash and be paid.
If our internal sales force is less successful than anticipated, our business expansion plans could suffer and our ability to generate revenue could be diminished.
Developing new products involves a lengthy and complex process, and if we do not achieve our projected development and commercialization goals in the timeframes we announce and expect, our business will suffer and our stock price may decline.
We must successfully integrate acquired businesses to realize the financial goals that we currently anticipate.
Aspects of our international business expose us to business, personnel, regulatory, political, operational, financial, and economic risks associated with doing business outside of the United States.
Our operating results may be adversely affected by unfavorable macroeconomic and market conditions.
Security breaches, loss of data and other disruptions to our or our third-party service providers' data systems could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.
If we are unable to protect or successfully defend our intellectual property effectively, our business may be harmed.
We may be involved in litigation related to intellectual property, which may be time-intensive and costly and may adversely affect our business, operating results or financial condition.

Risks Related to Being a Public Company

If we are unable to implement and maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our reported financial information and the market price of our common stock may be negatively affected.

Risks Related to Our Common Stock

Our stock price may be volatile, and you may not be able to sell shares of our common stock at or above the price you paid.

Risks Related to Our Business

We have a history of losses, and we expect to incur net losses for the foreseeable future and may never achieve or sustain profitability.

We have incurred net losses since our inception. For the three months ended March 31, 2024 and 2023, we had net losses of $2 million and $8 million, respectively. As of March 31, 2024, we had an accumulated deficit of $470 million. We expect to incur additional losses in the future as we continue to invest in our business, including increasing adoption of and reimbursement for our molecular diagnostic portfolio of tests, expanding our platform and operations internationally, attracting and retaining team members, developing and enhancing our platform, marketing and sales, and enhancing our infrastructure, and we may never achieve revenue sufficient to offset our expenses. Additionally, ongoing widespread inflationary pressures in the United States and across global economies have resulted in higher costs for our raw materials, non-material costs, labor and other business costs, and significant increases in the future could adversely affect our results of operations. We may never achieve or sustain profitability, and our failure to achieve and sustain profitability in the future could cause the market price of our common stock to decline.

Our financial results currently depend mainly on sales of our Afirma and Decipher Prostate tests, and we will need to generate sufficient revenue from these and our other diagnostic tests to grow our business.

Most of our revenue to date has been derived from the sale of our Afirma tests, which are used in the diagnosis of thyroid cancer. We also derive significant revenue from our Decipher urological tests. Over the next few years, we expect to continue to derive a substantial portion of our revenue from sales of our Afirma and Decipher tests. Once tests are clinically validated and commercially available for patient testing, we must continue to develop and publish evidence that our tests are informing clinical decisions in order for them to receive positive coverage decisions by payers. Without coverage policies, our tests may not be reimbursed and we will not be able to recognize revenue. We cannot guarantee that tests we commercialize will gain and maintain positive coverage decisions and therefore, we may never realize revenue from tests we commercialize. In addition, we are in various stages of research and development for other diagnostic tests that we may offer, but there can be no assurance that
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we will be able to identify other diseases that can be effectively addressed or, if we are able to identify such diseases, whether or when we will be able to successfully commercialize solutions for these diseases and obtain the evidence and coverage decisions from payers. If we are unable to increase sales and expand reimbursement for our Afirma and Decipher Prostate tests, or develop and commercialize other tests, our revenue and our ability to achieve and sustain profitability would be impaired, and the market price of our common stock could decline.

If we are unable to grow sales of our portfolio of tests or products, or we are unable to launch or commercialize our new tests, our business may suffer.

Although a number of our tests, such as Prosigna and Decipher Bladder, have not contributed significant revenue to date, we expect them to grow and become an increasingly important component of our portfolio, as well as our results of operations. We plan to introduce new tests going forward as well, including in MRD as a result of the C2i Acquisition. There can be no assurance that we will be successful in our launch or commercialization of new tests, nor that physicians will request our new tests be performed in sufficient volumes for our revenue to meet our projections. Additionally, we anticipate expanding the reach of some of our tests to international markets; if our products are not widely adopted internationally, our business and results of operations may be adversely affected.

We depend on a few payers for a significant portion of our revenue; if one or more significant payers stops providing reimbursement or decreases the amount of reimbursement for our tests, our revenue could decline.

Federal Medicare funding and state budgets are limited and have been placed under tremendous strain in recent years, which is likely to be further exacerbated as a result of macroeconomic uncertainty. Such budgetary pressures may force Medicare or state agencies to reduce payment rates or change coverage policies. If there is a decrease in Medicare or other payers’ payment rates for our tests, our revenue from Medicare and such payers will decrease and the payment rates for some of our commercial payers may also decrease if they tie their allowable rates to the Medicare rates. These changes could have an adverse effect on our business, financial condition and results of operations.

Revenue for tests performed on patients covered by Medicare and UnitedHealthcare Group was 31% and 9%, respectively, of our revenue for the three months ended March 31, 2024, compared with 31% and 10%, respectively, for the three months ended March 31, 2023. The percentage of our revenue derived from significant payers is expected to fluctuate from period to period as our revenue fluctuates, as additional payers provide reimbursement for our tests or if one or more payers were to stop reimbursing for our tests or change their reimbursed amounts.

Effective January 2012, Palmetto GBA, the regional Medicare Administrative Contractor, or MAC, that handled claims processing for Medicare services over our jurisdiction at that time, issued coverage and payment determinations for our Afirma Classifiers now covered by Noridian Healthcare Solutions, the current MAC for our jurisdiction, through the MolDX program, administered by Palmetto GBA, under a Local Coverage Determination, or LCD. In August 2023, a new Proposed LCD was issued for “Molecular Testing for Risk Stratification of Thyroid Nodules” through the MolDX program. We believe that this Proposed LCD would, if finalized, cover the Afirma classifier. There is no guarantee that this Proposed LCD will be finalized, or that the coverage criteria for the Afirma classifier under this Proposed LCD, if finalized, would be as advantageous as under the current LCD. Modifications to the current Medicare coverage of the Afirma classifier could have an adverse effect on our business, financial condition and results of operations.

On March 1, 2015, CPT code 81545 for the Afirma GEC was issued. On January 1, 2018, the Medicare Clinical Laboratory Fee Schedule payment rate for the Afirma classifier increased from $3,220 to $3,600. This rate is based on the volume-weighted median of private payer payment rates made between January 1 and June 30, 2016, which we reported to the Centers for Medicare & Medicaid Services in 2017 as required under the Protecting Access to Medicare Act of 2014, or PAMA. In December 2019, through the Further Consolidated Appropriations Act of 2020, Congress delayed the next data reporting period from 2020 to 2021 for final payments made between January 1 and June 30, 2019, extending the applicability of the payment rates based on 2017 reporting by one year through December 31, 2021. In March 2020, through the CARES Act, Congress further delayed the next reporting period to 2022 for final payments made between January 1 and June 30, 2019, extending the applicability for the payment rates based on 2017 reporting through December 31, 2022. In December 2021, through the Protecting Medicare and American Farmers from Sequester Cuts Act, Congress further delayed the next reporting period to 2023. In December 2022, through the Consolidated Appropriations Act of 2023, Congress further delayed the next reporting period to 2024. In November 2023, through the Further Continuing Appropriations and Other Extensions Act of 2024, Congress further delayed the next reporting period to 2025. The applicability of the payment rates based on 2017 reporting thus now extend through December 31, 2025. As a result of the transition from Afirma GEC to Afirma GSC, a new CPT Category I code (81546) was established for the Afirma classifier, effective January 1, 2021. This code went through the national payment determination process for Medicare in 2020, through which the Centers for Medicare & Medicaid Services, or CMS, priced
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81546 at the same rate of $3,600 as 81545. Since the Afirma GSC CPT code 81546 was newly issued in 2021, the first PAMA data reporting period for 81546 under the current triennial data reporting process is expected to be January 2028 through March 2028, resulting in a new potential reimbursement rate effective January 1, 2029. There is no guarantee that the Afirma GSC Medicare rate will not be negatively impacted in future PAMA reporting cycles based on the reported weighted median of private commercial payers.

Decipher Prostate Biopsy and Decipher Prostate RP are currently reimbursed by Medicare pursuant to LCDs issued by Palmetto GBA and adopted by Noridian Healthcare Solutions, each acting as a MAC, as well as by a number of commercial payers. However, there are many commercial payers who currently do not provide reimbursement for our prostate genomic tests, or provide only limited reimbursement, and we have contracts for reimbursement with only a limited number of commercial payers for our prostate tests. In August 2023, a new Proposed LCD was issued for “Gene Expression Profile Tests for Decision-Making in Castration Resistant and Metastatic Prostate Cancers” through the MolDX program. We believe that this Proposed LCD, if finalized, would broaden our Decipher Prostate coverage for Castration Resistant and Metastatic prostate cancer patients. There is no guarantee that this Proposed LCD will be finalized, or that the coverage criteria for the Decipher Prostate tests classifier under this Proposed LCD, if finalized, would be as advantageous as under the current LCD. Modifications to the current Medicare coverage of the Decipher Prostate tests could have an adverse effect on our business, financial condition and results of operations.

Our Decipher Prostate tests were assigned a new American Medical Association Current Procedural Terminology code, or CPT code, 81542, in 2020. CPT code changes can result in a risk of an error being made in the claim adjudication process. Such errors can occur with claims submission, third-party transmission or in the processing of the claim by the payer. Claim adjudication errors may result in a delay in payment processing or a reduction in the amount of the payment we receive.

We submit claims to Medicare for Decipher Prostate Biopsy and Decipher Prostate RP using CPT code 81542. CMS assigned 81542 to the gapfilling process in 2020, under which the individual MACs set the payment rate for the test based on the following four factors: (1) charges for the test and routine discounts to charges; (2) resources required to perform the test; (3) payment amounts determined by other payers; and (4) charges, payment amounts, and resources required for other tests that may be comparable or otherwise relevant. 81542 has been priced at $3,873 since January 1, 2021, based on CMS’ revision of the median of payment rates set by the MACs through the gapfilling process. Since the CPT code was issued in 2020, we expect the next PAMA reporting period to take place between January 2028 and March 2028, resulting in a potential new reimbursement rate effective January 1, 2029. There can be no assurance that the Medicare payment rates for Decipher Prostate Biopsy and Decipher Prostate RP will not decrease during a future reporting cycle under PAMA.

An LCD was issued for Prosigna by Palmetto GBA in August 2015, which has been in effect since October 1, 2015. There can be no assurance that the Prosigna payment rate will not decrease during subsequent reporting cycles under PAMA.

An LCD was issued by Noridian Healthcare Solutions to provide Medicare coverage for the Envisia Genomic Classifier on April 11, 2019.

We submit claims to Medicare for Envisia using CPT code 81554, which became effective January 1, 2021. We applied for New ADLT designation for Envisia, and the test was approved as a New ADLT on September 17, 2020. Effective October 1, 2020 through June 30, 2021, the Medicare payment rate for Envisia was set at $5,500, the actual list charge as defined under the ADLT regulations for the test. Veracyte reported private payer rates for Envisia in March 2021, reflecting final payments between October 1, 2020 and February 28, 2021. The volume-weighted median of these reported rates, which was $5,500, set the payment rate for Envisia from July 1, 2021 through December 31, 2022, after which Envisia will be priced based on private payer rates collected and reported annually. Effective January 1, 2024, the Medicare payment rate for 81554 is $5,500. There can be no assurance that the Medicare payment rate for Envisia will not be reduced when it is set based on the volume-weighted median of private payer rates. Current ADLT PAMA regulations require us to report these private payer rates for Envisia, 81554, annually.

Effective July 18, 2021, Decipher Bladder is reimbursed by Medicare pursuant to LCDs issued by three MACs and Decipher Bladder is covered by a fourth MAC, Noridian Healthcare Solutions, effective as of July 25, 2021. We have not yet contracted with any commercial payers for reimbursement of Decipher Bladder. Our Decipher Bladder test was assigned a new CPT code, 0016M, for 2020.

We submit claims to Medicare for Decipher Bladder using CPT code 0016M. CMS assigned 0016M to the gapfilling process in 2021. Since January 1, 2022, the payment rate for 0016M has been $3,489.63, based on the median of payment rates set by the MACs through the gapfilling process. There is no assurance that the Medicare payment rate for Decipher Bladder will not decrease during a future reporting cycle under PAMA.
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Although we have entered into contracts with certain third-party payers that establish in-network allowable rates of reimbursement for many of our tests, payers may suspend or discontinue reimbursement at any time, with or without notice, for technical or other reasons, may require or increase co-payments from patients, or may reduce the reimbursement rates paid to us. Reductions in private payer amounts could decrease the Medicare payment rates for our tests under PAMA. In addition, many private payers now require prior authorization for molecular diagnostic tests. Potential reductions in reimbursement rates or increases in the difficulty of achieving payment could have a negative effect on our revenue.

If payers do not provide reimbursement, rescind or modify their reimbursement policies, delay payments for our tests, recoup past payments, or if we are unable to successfully negotiate additional reimbursement contracts, our commercial success could be compromised.

Physicians might not order our tests unless payers reimburse a substantial portion of the test price. There is significant uncertainty concerning third-party reimbursement of any test incorporating new technology, including our tests. Reimbursement by a payer may depend on a number of factors, including a payer’s determination that these tests are:

not experimental or investigational;
pre-authorized and appropriate for the specific patient;
cost-effective;
supported by peer-reviewed publications; and
included in clinical practice guidelines.

Since each payer makes its own decision as to whether to establish a coverage policy or enter into a contract to reimburse our tests, seeking these approvals is a time-consuming and costly process.

We are an out-of-network provider with some commercial payers in the United States and thus, we do not have control over rates or terms of reimbursement. Without contracted rates for reimbursement, our claims are often denied upon submission, and we must appeal the claims. The appeals process is time consuming and expensive and may not result in payment. In cases where we are out-of-network, there is typically a greater patient cost-share responsibility which may result in further delays and/or decreased likelihood of collection. Payers may attempt to recoup prior payments after review, sometimes after significant time has passed, which would impact future revenue.

We expect to continue to focus substantial resources on increasing adoption, coverage and reimbursement for the Afirma, Decipher Prostate, Prosigna, Envisia and Decipher Bladder, as well as any other future tests we may develop. We believe it will take several years to achieve coverage and contracted reimbursement with a majority of third-party payers across our entire portfolio of tests. We cannot predict whether, under what circumstances, or at what payment levels payers will reimburse for our tests. Also, payer consolidation is underway and creates uncertainty as to whether coverage and contracts with existing payers will remain in effect. Finally, if there is a decrease in the Medicare payment rates for our tests, the payment rates for some of our commercial payers may also decrease if they tie their allowable rates to the Medicare rates. Reductions in private payer amounts could decrease the Medicare payment rates for our tests under PAMA. Our failure to establish broad adoption of and reimbursement for our tests, or our inability to maintain existing reimbursement from payers, will negatively impact our ability to generate revenue and achieve profitability, as well as our future prospects and our business.

We may experience limits on our revenue if physicians decide not to order our tests.

If we are unable to create or maintain demand for our tests in sufficient volume, we may not become profitable. To generate demand, we will need to continue to educate physicians about the clinical utility and cost-effectiveness of our tests through published papers, presentations at scientific conferences, marketing campaigns and one-on-one education by our sales force. In addition, our ability to obtain and maintain adequate reimbursement from third-party payers will be critical to generating revenue.

The Afirma genomic classifier is included in most physician practice guidelines in the United States for the assessment of patients with thyroid nodules. However, historical practice recommended a full or partial thyroidectomy in cases where cytopathology results were indeterminate to confirm a diagnosis.

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The strength of the clinical data supporting the use of the Decipher Prostate Genomic Classifier have led to the test’s inclusion in leading clinical guidelines. For example, the Decipher test received a “Level 1B” evidence designation in the 2024 NCCN Guidelines(R), or NCCN Guidelines, for prostate cancer, distinguishing it as the only gene-expression test to do so.

Although Decipher Prostate Genomic Classifier has been integrated into the NCCN Guidelines, if we are unsuccessful in maintaining and increasing the level of recommendation of our genomic tests within these guidelines, are unable to cause any new genomic tests we develop to be included in these guidelines, are unable to cause our genomic tests to be included in other influential guidelines, or if our competitors are successful at achieving similar or more extensive guidelines for their tests, we may be at a disadvantage in gaining market acceptance and market share relative to our competitors.

Our Envisia test is included but not yet recommended in practice guidelines and physicians may be reluctant to order tests that are not recommended in these guidelines. The Prosigna test is included in practice guidelines in the United States and internationally but faces competition from other products globally.

Because our Afirma, Decipher Prostate Genomic Classifier, Envisia, and Decipher Bladder testing services are performed by our certified laboratories under the CLIA, rather than by the local laboratory or pathology practice, pathologists may be reluctant to support our testing services as well. Guidelines that include our tests currently may subsequently be revised to recommend another testing protocol, and these changes may result in physicians deciding not to use our tests. Lack of guideline inclusion could limit the adoption of our tests and our ability to generate revenue and achieve profitability. To the extent international markets have existing practices and standards of care that are different than those in the United States, we may face challenges with the adoption of our tests in international markets.

We may experience limits on our revenue if patients decide not to use our tests as a result of increased costs, fees or changing insurer policies.

Some patients may decide not to use our tests because of price, all or part of which may be payable directly by the patient if the patient’s insurer denies reimbursement in full or in part. There is a growing trend among insurers to shift more of the cost of healthcare to patients in the form of higher co-payments or premiums, and this trend is accelerating which puts patients in the position of having to pay more for our tests. In addition, rising interest rates and ongoing inflation in the United States and globally may put further pressure on insurers and other providers to raise prices or reduce reimbursement, increasing the cost to the patient. We expect to continue to see pressure from payers to limit the utilization of tests, generally, and we believe more payers are deploying costs containment tactics, such as pre-authorization and employing laboratory benefit managers to reduce utilization rates. Implementation of provisions of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively the ACA, has also resulted in increases in premiums and reductions in coverage for some patients. These events may result in patients delaying or forgoing medical checkups or treatment due to their inability to pay for our tests, which could have an adverse effect on our revenue.

If we fail to comply with federal and state licensing requirements, we could lose the ability to perform our tests or experience disruptions to our business.

We are subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA regulations mandate specific personnel qualifications, facilities administration, quality systems, inspections, and proficiency testing. CLIA certification is also required for us to be eligible to bill state and federal healthcare programs, as well as many private third-party payers. To renew these certifications, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may conduct random inspections of our clinical reference laboratories. If we fail to maintain CLIA certificates in our South San Francisco, California; San Diego, California; or Austin, Texas laboratory locations, we would be unable to bill for services provided by state and federal healthcare programs, as well as many private third-party payers, which may have an adverse effect on our business, financial condition and results of operations.

We are also required to maintain state licenses to conduct testing in our laboratories. California, New York, and Texas, among other states’ laws, require that we maintain a license and comply with state regulation as a clinical laboratory. Other states may have similar requirements or may adopt similar requirements in the future. In addition, all of our clinical laboratories are required to be licensed on a test-specific basis by New York. We have received approval for the Afirma, Decipher Prostate, Envisia and Decipher Bladder tests. We will be required to obtain approval for other tests we may offer in the future. If we were to lose our CLIA certificate or California license for our South San Francisco or San Diego laboratories, whether as a result of revocation, suspension, limitation or otherwise, we would no longer be able to perform our molecular tests, which would eliminate our primary source of revenue and harm our business. If we fail to meet the state licensing requirements for our Austin laboratory, whether as a result of revocation, suspension, limitation or otherwise, it could result in a delay in processing
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tests during that transition and increased costs. If we were to lose our licenses issued by New York or by other states where we are required to hold licenses, we would not be able to test specimens from those states. New tests we may develop may be subject to new approvals by regulatory bodies such as the New York State Department of Health, and we may not be able to offer our new tests until such approvals are received. Furthermore, certain state agencies have been experiencing delays in their response time which may cause delay in our receipt of our corresponding approvals or renewals for our tests.

Our quarterly operating results may fluctuate significantly or may fall below the expectations of investors or securities analysts for various reasons, including in response to the way we recognize revenue and/or the amount of cash we generate, which may cause our stock price to fluctuate or decline.

Our quarterly financial and operating results depend on sales of our products in the markets we operate and are sensitive to a number of factors, including patient and clinician demand, market conditions in the United States and globally, and the prevalence of the indications we seek to address. In addition, we cannot be sure that we will be able to successfully complete development of or commercialize any of our planned future products, or that they will prove to be capable of reliably being used. Before we can successfully develop and commercialize any of our currently planned or other new diagnostic solutions, we will need to:

conduct substantial research and development;
obtain the necessary testing samples and related data;
conduct analytical and clinical validation studies, as well as clinical utility studies;
expend significant funds;
expand and scale-up our laboratory processes;
expand and train our sales force;
gain acceptance from a large number of ordering clinicians;
gain acceptance from ordering laboratories; and
seek and obtain regulatory clearances, approvals or certifications of our new solutions, as required by applicable regulatory bodies.

This process involves a high degree of risk and may take up to several years or more. Our test development and commercialization efforts may be delayed or fail for many reasons, including:

failure of the test at the research or development stage;
difficulty in accessing suitable testing samples, especially testing samples with known clinical results;
lack of analytical and clinical validation data to support the effectiveness of the test, or lack of clinical utility data to support the value of the test;
delays resulting from the failure of third-party suppliers or contractors to meet their obligations in a timely and cost-effective manner;