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


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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company 
  Emerging growth company 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No x
 
As of May 7, 2021, there were 67,248,259 shares of common stock, par value $0.001 per share, outstanding.




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VERACYTE, INC.
INDEX
 
 Page
No.
 
 





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PART I. — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

VERACYTE, INC. 
Condensed Consolidated Balance Sheets 
(unaudited)
(In thousands, except share and per share amounts)
 
 March 31, 2021December 31, 2020
  (See Note 1)
Assets  
Current assets:  
Cash and cash equivalents$324,062 $349,364 
Accounts receivable27,877 18,461 
Supplies6,308 4,657 
Prepaid expenses and other current assets3,845 3,197 
Total current assets362,092 375,679 
Property and equipment, net10,562 8,990 
Right-of-use assets - operating lease15,186 7,843 
Intangible assets, net159,423 59,924 
Goodwill474,838 2,725 
Restricted cash749 603 
Other assets2,286 1,399 
Total assets$1,025,136 $457,163 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$7,137 $3,116 
Accrued liabilities16,254 11,705 
Current portion of deferred revenue454 371 
Current portion of acquisition related contingent consideration5,986  
Current portion of operating lease liability2,878 1,589 
Total current liabilities32,709 16,781 
Long-term debt863 810 
Deferred revenue, net of current portion747 829 
Deferred tax liability750  
Acquisition-related contingent consideration, net of current portion1,800 7,594 
Operating lease liability, net of current portion14,036 9,917 
Total liabilities50,905 35,931 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, 0 shares issued and outstanding as of March 31, 2021 and December 31, 2020
  
Common stock, $0.001 par value; 125,000,000 shares authorized, 67,236,162 and 58,200,526 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
67 58 
Additional paid-in capital1,297,626 702,768 
Accumulated deficit(323,462)(281,594)
Total stockholders’ equity974,231 421,232 
Total liabilities and stockholders’ equity$1,025,136 $457,163 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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

 Three Months Ended March 31,
 20212020
Revenue:  
Testing revenue$33,078 $26,991 
Product revenue3,059 3,409 
Biopharmaceutical revenue566 722 
Total Revenue36,703 31,122 
Operating expenses:
Cost of testing revenue10,832 10,568 
Cost of product revenue1,490 1,559 
Cost of biopharmaceutical revenue81 116 
Research and development5,336 4,407 
Selling and marketing16,296 17,584 
General and administrative46,282 7,813 
Intangible asset amortization1,801 1,275 
Total operating expenses82,118 43,322 
Loss from operations(45,415)(12,200)
Interest expense(53)(55)
Other (loss) income, net(195)539 
Loss before income tax benefit(45,663)(11,716)
Income tax benefit(3,795) 
Net loss and comprehensive loss$(41,868)$(11,716)
Net loss per common share, basic and diluted$(0.66)$(0.24)
Shares used to compute net loss per common share, basic and diluted63,331,702 49,792,631 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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VERACYTE, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(In thousands)
 
 Common StockAdditional
Paid-in
Capital
Accumulated DeficitTotal
Stockholders'
Equity
 SharesAmount
Balance at December 31, 202058,201 $58 $702,768 $(281,594)$421,232 
Sale of common stock in a public offering, net of offering costs of $38,677
8,547 9 593,812 — 593,821 
Issuance of common stock on exercise of stock options and vesting of restricted stock units439 — 2,806 — 2,806 
Issuance of common stock under employee stock purchase plan (ESPP)49 — 1,159 — 1,159 
Tax portion of vested restricted stock units— — (6,774)— (6,774)
Stock-based compensation expense (employee)— — 3,657 — 3,657 
Stock-based compensation expense (non-employee)— — 16 — 16 
Stock-based compensation expense (ESPP)— — 182 — 182 
Net loss and comprehensive loss— — — (41,868)(41,868)
Balance at March 31, 202167,236 $67 $1,297,626 $(323,462)$974,231 
 
 Common StockAdditional Paid-in
Capital
Accumulated
Deficit
Total Stockholders' Equity
 SharesAmount
Balance at December 31, 201949,625 $50 $486,090 $(246,685)$239,455 
Issuance of common stock on exercise of stock options and vesting of restricted stock units314 — 981 — 981 
Issuance of common stock under ESPP61 — 1,101 — 1,101 
Tax portion of vested restricted stock units— — (2,304)— (2,304)
Stock-based compensation expense (employee)— — 2,551 — 2,551 
Stock-based compensation expense (ESPP)— — 354 — 354 
Net loss and comprehensive loss— — — (11,716)(11,716)
Balance at March 31, 202050,000 $50 $488,773 $(258,401)$230,422 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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VERACYTE, INC.  
Condensed Consolidated Statements of Cash Flows 
(Unaudited) 
(In thousands)

 Three Months Ended March 31,
 20212020
Operating activities  
Net loss$(41,868)$(11,716)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization2,550 1,972 
Stock-based compensation3,855 2,905 
Benefit from income taxes(3,795) 
Interest on end-of-term debt obligation53 54 
Write-down of excess supplies 1,088 
Noncash lease expense258 232 
Revaluation of acquisition-related contingent consideration192 (484)
Effect of foreign currency on operations82  
Changes in operating assets and liabilities:
Accounts receivable(3,748)238 
Supplies(10)(376)
Prepaid expenses and other current assets132 (818)
Other assets(58)135 
Operating lease liability(373)(331)
Accounts payable1,931 5,450 
Accrued liabilities and deferred revenue238 (3,650)
Net cash used in operating activities(40,561)(5,301)
Investing activities
Acquisition of business, net of cash acquired(574,411) 
Purchases of property and equipment(1,196)(665)
Net cash used in investing activities(575,607)(665)
Financing activities
Proceeds from the issuance of common stock in a public offering, net of issuance costs593,821  
Payment of taxes on vested restricted stock units(6,774)(2,304)
Proceeds from the exercise of common stock options and employee stock purchases3,965 2,085 
Net cash provided by (used in) financing activities591,012 (219)
Net decrease in cash, cash equivalents and restricted cash(25,156)(6,185)
Cash, cash equivalents and restricted cash at beginning of period349,967 159,920 
Cash, cash equivalents and restricted cash at end of period$324,811 $153,735 
Supplementary cash flow information:
Purchases of property and equipment included in accounts payable and accrued liability$357 $113 
Interest paid on debt$ $1 

Cash, Cash Equivalents and Restricted Cash:
 March 31, 2021December 31, 2020
Cash and cash equivalents$324,062 $349,364 
Restricted cash749 603 
Total cash, cash equivalents and restricted cash$324,811 $349,967 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)

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

Veracyte was incorporated in the state of Delaware on August 15, 2006 as Calderome, Inc. Calderome operated as an incubator until early 2008. On March 4, 2008, the Company changed its name to Veracyte, Inc. The Company’s operations are based in South San Francisco, California and Austin, Texas. On March 12, 2021, the Company acquired Decipher Biosciences, Inc., or Decipher Biosciences, with operations based in San Diego, California.

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

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

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

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

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

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

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

Bladder Cancer – Decipher Bladder Genomic Classifier. The Decipher Bladder test helps determine which patients with muscle-invasive bladder cancer may benefit from neoadjuvant chemotherapy prior to radical cystectomy. Veracyte believes its test will be the only genomic subtyping tool available to physicians in the United States treating patients with locally advanced bladder cancer. The Company plans to expand commercialization of the Decipher Bladder test upon receiving final Medicare coverage for the test, which is expected in mid-2021.

The Company performs its genomic tests for thyroid cancer, lung cancer and IPF in its CLIA-certified laboratory in South San Francisco, California and its genomic tests for prostate and bladder cancer in its College of American Pathologists, or CAP, accredited and CLIA-certified laboratory in San Diego, California. In December 2019, the Company acquired from NanoString, Inc. the exclusive global diagnostics license to the nCounter Analysis System and the Prosigna breast cancer prognostic gene signature assay, which is commercially available, along with the LymphMark lymphoma subtyping assay, which is in development. Both tests are designed for use on the nCounter Analysis System. The Prosigna test kits and associated products are sold to laboratories and hospitals in global markets including the United States.

Veracyte’s whole-transcriptome approach, including RNA sequencing, also provides multiple opportunities for partnerships with biopharmaceutical and diagnostic testing companies. In developing its products, the Company has built or gained access to unique biorepositories, proprietary technology and bioinformatics that it believes are important to the development of new targeted therapies, determining clinical trial eligibility and guiding treatment selection. Additionally, the Company believes that the nCounter Analysis System provides an attractive distributed platform for other diagnostic companies seeking to make their genomic tests available to global markets.
 
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, 2021 the condensed consolidated statements of operations and
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
comprehensive loss for the three months ended March 31, 2021 and 2020, the condensed consolidated statements of stockholders' equity for the three months ended March 31, 2021 and 2020, and the condensed consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of its financial position, operating results, stockholders' equity and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2020 has been derived from audited financial statements. The results for the three months ended March 31, 2021 are not necessarily indicative of the results expected for the full year or any other period. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company operates in one segment.
 
The accompanying interim period condensed consolidated financial statements and related financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
 
Use of Estimates
 
The preparation of unaudited interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Items subject to such estimates include: revenue recognition; write-down of supplies; the useful lives of property and equipment; the recoverability of long-lived assets; the incremental borrowing rate for leases; accounting for acquisitions; the estimation of the fair value of intangible assets and contingent consideration; variable interest entity assessment; impairment of equity investment, at cost; stock options; income tax uncertainties, including a valuation allowance for deferred tax assets; reserve on accounts receivable and contingencies. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions.

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

Concentrations of Credit Risk and Other Risks and Uncertainties
 
The worldwide spread of coronavirus, or COVID-19, has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of COVID-19 and the extent to which COVID-19 impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict. If the financial markets or the overall economy are impacted for an extended period, the Company’s liquidity, revenues, supplies, goodwill and intangibles may be adversely affected. The Company considers the effects of COVID-19 pandemic in developing our estimates.
 
The majority of the Company’s cash and cash equivalents are deposited with one major financial institution in the United States. Deposits in this institution may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents.
 
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
Several of the components of the Company’s sample collection kits and test reagents, and the nCounter system and related diagnostic kits are obtained from single-source suppliers. If these single-source suppliers fail to satisfy the Company’s requirements on a timely basis, it could suffer delays in being able to deliver its diagnostic solutions, a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results.
 
The Company is also subject to credit risk from its accounts receivable related to its sales. Credit risk for accounts receivable from testing revenue is incorporated in testing revenue accrual rates as the Company assesses historical collection rates and current developments to determine accrual rates and amounts the Company will ultimately collect. The Company generally does not perform evaluations of customers’ financial condition for testing revenue and generally does not require collateral. The Company assesses credit risk and the amount of accounts receivable the Company will ultimately collect for product, biopharmaceutical and collaboration revenue based on collection history, current developments and credit worthiness of the customer. The estimate of credit losses is not material at March 31, 2021.

Through March 31, 2021, most of the Company’s revenue has been derived from the sale of Afirma. To date, Afirma has been delivered primarily to physicians in the United States. The Company’s third-party payers and other customers in excess of 10% of total revenue and their related revenue as a percentage of total revenue were as follows:
 
 Three Months Ended March 31,
 20212020
Medicare27 %25 %
UnitedHealthcare11 %11 %
 38 %36 %

 
The Company’s third-party payers and other customers in excess of 10% of accounts receivable and their related accounts receivable balance as a percentage of total accounts receivable were as follows at the following dates:
 
 March 31, 2021December 31, 2020
Medicare21 %13 %
UnitedHealthcare10 %12 %

Restricted Cash
 
The Company had deposits of $749,000 and $603,000 included in long-term assets as of March 31, 2021 and December 31, 2020, restricted from withdrawal and held by banks in the form of collateral for irrevocable standby letters of credit held as security for the Company's leases.
 
Revenue Recognition
 
Testing Revenue
 
The Company recognizes testing revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers, or ASC 606. Most of the Company’s revenue is generated from the provision of testing services. These services are completed upon the delivery of test results to the prescribing physician, at which time the Company bills for the services. The Company recognizes revenue related to billings based on estimates of the amount that will ultimately be realized. In determining the amount to accrue for a delivered test, the Company considers factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. These estimates require significant judgment by management. Actual results could differ from those estimates and assumptions.
 
During 2021, the Company changed its revenue estimates due to actual and anticipated cash collections for tests delivered in prior quarters and recognized additional revenue of $0.2 million for the three months ended March 31, 2021. These
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
adjustments resulted in decreases in the Company's loss from operations of $0.2 million and no change in basic and diluted net loss per share for the three months ended March 31, 2021. The change in testing revenue estimates for the three months ended March 31, 2020 was less than $0.1 million.
 
Product Revenue
 
Product revenue from instruments and diagnostic kits is recognized generally upon shipment or when the instrument is ready for use by the end customer, which is when title of the product has been transferred to the customer. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. Performance obligations are considered satisfied once the Company has transferred control of a product to the customer, meaning the customer has the ability to use and obtain the benefit of the product. The Company recognizes product revenue for satisfied performance obligations only when there are no uncertainties regarding payment terms or transfer of control. Shipping and handling costs incurred for product shipments are included in product revenue. Revenues are presented net of the taxes that are collected from customers and remitted to governmental authorities. There was no revenue from instrument sales for three months ended March 31, 2021 or 2020.
 
Biopharmaceutical and Collaboration Revenue
 
From time to time, the Company enters into arrangements for research and development and/or commercialization services. Such arrangements may require the Company to deliver various rights, services and/or samples, including intellectual property rights/licenses, research and development services, and/or commercialization services. The underlying terms of these arrangements generally provide for consideration to the Company in the form of nonrefundable upfront license fees, development and commercial performance milestone payments, royalty payments, and/or profit sharing. Net sales of data or other services to customers are recognized in accordance with ASC 606 and are classified under biopharmaceutical revenue. Certain milestone payments fall under the scope of ASC Topic 808, Collaborative Arrangements, or ASC 808, and are classified under collaboration revenue. Payments received that are not sales or services to a customer or collaboration revenue are recorded as offsets against research and development expense in the Company's consolidated statements of operations and comprehensive loss.

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

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

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

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

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

Diagnostic Development Agreement with Johnson & Johnson

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

The agreements are considered to be within the scope of ASC 808 with respect to the milestone payments, as the parties are active participants and exposed to the risks and rewards of the collaborative activity. The delivery of data under the collaborative arrangement, which the Company believes is a distinct service for which Johnson & Johnson meets the definition of a customer is within the scope of ASC 606. Using the concepts of ASC 606, the Company has identified the delivery of data as its only performance obligation. The grant of the license is not distinct from other performance obligations as the customer receives benefit only when other performance obligations are met. The Company further determined that the transaction prices under the arrangements are the $18.0 million in payments which was allocated to the obligation to deliver data. The $13.0 million in future potential payments is considered variable consideration because the Company determined that the potential payments are contingent upon regulatory and commercialization milestones that are uncertain to occur and, as such, were not included in the transaction price, and will be recognized accordingly as each potential payment becomes probable.
 
For the three months ended March 31, 2021 and March 31, 2020, the Company recognized $0.2 million and $0.3 million, respectively, of revenue under this contract. Accounts receivable from JJSI was $0.1 million at March 31, 2021 and zero at December 31, 2020. There was $1.1 million and $1.0 million of deferred revenue related to this agreement at March 31, 2021 and December 31, 2020, respectively.
 
Other Collaboration and Service Agreements
 
The Company has entered into agreements with biopharmaceutical companies and other diagnostic companies to provide them with data, development services and the right to develop tests on the nCounter Analysis System. For three months ended March 31, 2021 and 2020 the Company recognized biopharmaceutical revenue of $0.4 million and $0.4 million, respectively, for development services. There was $0.1 million and zero of deferred revenue related to these agreements at March 31, 2021 and December 31, 2020, respectively. Accounts receivable from these contracts totaled $0.5 million at March 31, 2021 and $0.4 million at December 31, 2020.

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

Recent Accounting Pronouncements
 
In December 2019, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update, or ASU, 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This standard simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. This ASU removes the following exceptions: (1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; (2) exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in this ASU also improve consistency and simplify other areas of Topic 740 by clarifying and amending existing guidance. The revised guidance will be applied prospectively and became effective for the Company beginning January 1, 2021 and the adoption of ASU 2019-12 did not have a material impact on our condensed consolidated financial statements.
 
2. Net Loss Per Common Share
 
Basic net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. The following 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,
 20212020
Shares of common stock subject to outstanding options3,944,887 4,760,128 
Employee stock purchase plan15,720 19,857 
Restricted stock units886,584 936,524 
Total common stock equivalents4,847,191 5,716,509 

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3. Balance Sheet Components

Goodwill

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

Amounts
Balance as of December 31, 2020
$2,725 
Goodwill Acquired - Decipher Biosciences472,113 
Balance as of March 31, 2021
$474,838 

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, 2021December 31, 2020Weighted Average Amortization Period (Years)
 Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Percepta product technology$16,000 $(6,400)$9,600 $16,000 $(6,133)$9,867 15
Prosigna product technology4,120 (366)3,754 4,120 (298)3,822 15
Prosigna customer relationships2,430 (648)1,782 2,430 (526)1,904 5
nCounter Dx license46,880 (4,167)42,713 46,880 (3,386)43,494 15
LymphMark product technology990 (189)801 990 (153)837 7
Decipher product technology90,000 (484)89,516    10
Decipher trade names4,000 (43)3,957    5
Total finite-lived intangibles164,420 (12,297)152,123 70,420 (10,496)59,924 11.6
In-process research and development7,300 — 7,300 — — — 
Total intangible assets$171,720 $(12,297)$159,423 $70,420 $(10,496)$59,924 

Amortization of the finite-lived intangible assets is recognized on a straight-line basis. Amortization expense of $1.8 million and $1.3 million was recognized for the three months ended March 31, 2021 and 2020, respectively.
The estimated future aggregate amortization expense as of March 31, 2021 is as follows (in thousands of dollars):
Year Ending December 31,Amounts
2021 remainder of year$11,129 
202214,837 
202314,837 
202414,797 
202514,351 
Thereafter82,172 
Total$152,123 
 
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Accrued Liabilities

Accrued liabilities consisted of the following (in thousands of dollars):
 
 March 31, 2021December 31, 2020
Accrued compensation expenses$10,214 $9,201 
Accrued other6,040 2,504 
Total accrued liabilities$16,254 $11,705 
 
4. Business Combination
 
Decipher Biosciences

On March 12, 2021, the Company acquired 100% of the equity interests of Decipher Biosciences, a privately-held company developing diagnostic tests in urologic cancers, for approximately $594.7 million, comprised of approximately $550.5 million in the form of upfront cash consideration and the remainder in cash payable post-acquisition of which $43.8 million was paid prior to March 31, 2021. The Company incurred approximately $10.0 million of transaction costs related to the acquisition of Decipher Biosciences which were recorded as general and administrative expense during the three months ending March 31, 2021.

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

The Company included the financial results of Decipher Biosciences in its consolidated financial statements from the acquisition date, which contributed $3.8 million and $0.8 million of revenue and net income, respectively, during the three months ended March 31, 2021.

The following table summarizes the purchase price and nonrecurring post-compensation expense recorded as a part of the acquisition (in thousands):

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

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the fair values of
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
assets acquired and liabilities assumed through the Company's acquisition of Decipher Biosciences at the date of acquisition (in thousands):
 
Cash and cash equivalents$19,782 
Accounts receivable5,765 
Supplies inventory1,641 
Prepaids and other current assets778 
Property and equipment, net1,737 
Operating lease assets7,601 
Finite-lived intangible assets94,000 
Indefinite-lived intangible assets7,300 
Restricted cash146 
Other assets829 
Total identifiable assets acquired139,579 
Accounts payable(2,351)
Accrued liabilities(4,322)
Operating lease obligations (current)(1,241)
Operating lease obligations, net of current portion(4,540)
Deferred tax liability(4,544)
Net identifiable assets acquired122,581 
Goodwill472,113 
Total purchase price$594,694 
 
Based on the guidance provided in ASC 805, the Company accounted for the acquisition of Decipher Biosciences as a business combination in which the Company determined that Decipher Biosciences was a business which combines inputs and processes to create outputs, and substantially all of the fair value of gross assets acquired was not concentrated in a single identifiable asset or group of similar identifiable assets.

The Company's purchase price allocation for the acquisition is preliminary and subject to revision as additional information about the fair value of the assets and liabilities becomes available. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions and may be subject to change as additional information is received. Primary areas that are not yet finalized are related to accounts receivable, an operating lease intangible asset, 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.

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

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

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

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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition resulted in the recognition of $472.1 million of goodwill which the Company believes consists primarily of expanded market and product opportunities, including new areas of genomic testing, as well as the potential expansion of the Company's product offerings in international markets. Furthermore, the acquisition of Decipher Biosciences gives the Company a presence in seven of the ten most common cancers impacting patients in the United States, which in turn enhances the Company’s overall prominence in the genomic testing arena. Goodwill created as a result of the acquisition is not deductible for tax purposes. The acquisition advances the Company's objective to improve the lives of patients through innovations in genomic technology tailored for diagnostic, prognostic, and treatment decisions related to urologic cancers.

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

Supplemental Pro Forma Information (unaudited)

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

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

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

Three Months Ended March 31,
20212020
Total revenues$48,680 $38,997 
Net Income (loss)$1,680 $(59,913)

Related Party Transactions

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

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

The fair value of the Company’s financial assets includes money market funds and deposits for leases of the Company's facilities. Money market funds, included in cash and cash equivalents in the accompanying condensed consolidated balance sheets, were $319.2 million and $346.8 million as of March 31, 2021 and December 31, 2020, respectively, and are Level I assets as described above. The deposits for the leases, included in restricted cash in the accompanying condensed consolidated balance sheets, was $749,000 and $603,000 as of March 31, 2021 and December 31, 2020, respectively, and is a Level I asset as described above.
 
On December 3, 2019, the Company acquired from NanoString the exclusive global diagnostics license to the nCounter Analysis System, the Prosigna breast cancer prognostic gene signature assay, and the LymphMark lymphoma subtyping assay. Pursuant to the terms of the agreement, Veracyte paid NanoString $40.0 million in cash and $10.0 million in Veracyte common stock, and may pay up to an additional $10.0 million in cash, contingent upon the commercial launch of Veracyte diagnostic tests for use on the platform. This contingency was valued at $6.1 million as of the acquisition date and is remeasured to fair value at each reporting date until the contingent consideration is settled. As of March 31, 2021 and December 31, 2020, this contingency was remeasured to $7.8 million and $7.6 million, respectively, with the corresponding changes included in general and administrative expense in the Company's condensed consolidated statements of operations and comprehensive loss. The fair value of the contingent consideration includes inputs that are not observable in the market and thus represent a Level III financial liability. The estimation of the fair value of the contingent consideration is based on the present value of the expected payments calculated by assessing the likelihood of when the related milestones would be achieved, discounted using the Company's estimated borrowing rate. These estimates form the basis for making judgments about the carrying value of the contingent consideration that are not readily apparent from other sources. Changes to the forecasts for the achievement of the milestones and the estimates of the borrowing rate can significantly affect the estimated fair value of the contingent consideration.  As of March 31, 2021, the achievement of two of the milestones is forecasted to occur within the next 12 months.  As a result, $6.0 million of the contingent consideration is included in short term liabilities and $1.8 million is included in long term liabilities in the condensed consolidated balance sheets. As of March 31, 2021 and December 31, 2020, the Company calculated the estimated fair value of the milestones using the following significant unobservable inputs:
 
Value or Range (Weighted-Average)
Unobservable inputMarch 31, 2021December 31, 2020
Discount rate6.26.9
Probability of achievement
70% - 100% (86%)
70% - 100% (86%)
 
6. Commitments and Contingencies
 
Operating Leases
 
The Company leases office and laboratory facilities in South San Francisco and San Diego, California and Austin Texas under various non-cancelable lease agreements. The lease terms extend to January 2029 and contain extension of lease term and expansion options. The leases have a weighted average remaining lease term of 5.2 years as of March 31, 2021. The Company had deposits of $749,000 and 603,000 included in long-term assets as of March 31, 2021 and December 31, 2020, respectively, restricted from withdrawal and held by banks in the form of collateral for irrevocable standby letters of credit held as security for the leases.

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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 6.7% based on the rate that the Company would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments in a similar economic environment. Operating lease liabilities along with the associated right-of-use assets are disclosed in the accompanying condensed consolidated balance sheets. After the adoption of ASC 842, Leases, the Company classified its deferred rent for tenant improvements with its operating lease right-of-use assets on the consolidated balance sheets. In connection with the acquisition of Decipher Biosciences, the Company identified certain off-market rate leases and has preliminarily estimated an intangible asset of $1.8 million which is included in operating lease assets and will be amortized over the remaining lease term. See Note 4 for more information on the acquisition of Decipher Biosciences.
 
Future minimum lease payments under non-cancelable operating leases as of March 31, 2021 are as follows (in thousands of dollars):
 
Year Ending December 31,Amounts
Remainder of 2021$2,760 
20223,770 
20233,880 
20243,991 
20254,103 
Thereafter1,661 
Total future minimum lease payments20,165 
Less: amount representing interest3,251 
Present value of future lease payments16,914 
Less: short-term lease liabilities2,878 
Long-term lease liabilities$14,036 
 
The Company recognizes operating lease expense on a straight-line basis over the non-cancelable lease period. Operating lease expense was $0.6 million and $0.5 million for the three months ended March 31, 2021 and 2020, respectively. Cash paid for amounts included in the measurement of lease liabilities was $0.6 million for each of the three months ended March 31, 2021 and 2020.
 
Contingencies
 
From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its condensed consolidated financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company believes there is no legal proceeding pending that could have, either individually or in the aggregate, a material adverse effect on the Company’s condensed consolidated financial statements.
 
7. Debt
 
Loan and Security Agreement
 
On November 3, 2017, the Company entered into a loan and security agreement, or Loan and Security Agreement, with Silicon Valley Bank. The Loan and Security Agreement allows the Company to borrow up to $35.0 million, with a $25.0 million advance term loan, or Term Loan Advance, and a revolving line of credit of up to $10.0 million, or Revolving Line of Credit. The Term Loan Advance was advanced upon the closing of the Loan and Security Agreement and was used to pay the outstanding balance of the Company’s existing long-term debt, which was canceled at that date. The Company had not drawn on the Revolving Line of Credit as of March 31, 2021. Borrowings under the Loan and Security Agreement mature on October 1, 2022. Amounts may be borrowed and repaid under the Revolving Line of Credit up until the earliest of full repayment or maturity of the Loan and Security Agreement, termination of the Loan and Security Agreement, or October 1, 2022.
 
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VERACYTE, INC.
Notes to Financial Statements
(unaudited)
The Term Loan Advance bears interest at a variable rate equal to (i) the thirty-day U.S. London Interbank Offer Rate, or LIBOR, plus (ii) 4.20%, with a minimum rate of 5.43% per annum. Principal amounts outstanding under the Revolving Line of Credit bear interest at a variable rate equal to (i) LIBOR plus (ii) 3.50%, with a minimum rate of 4.70% per annum.
 
The Company may prepay the outstanding principal amount under the Term Loan Advance plus accrued and unpaid interest and, if the Term Loan Advance is repaid in full, a prepayment premium of $250,000. In 2019 and 2020, the Company prepaid $24.9 million and $0.1 million, respectively, of the principal amount of the Term Loan Advance. These prepayments did not trigger any prepayment premium because they were partial, not full, repayments of the principal amount.

In addition, a final payment on the Term Loan Advance in the amount of $1.2 million is due upon the earlier of the maturity date of the Term Loan Advance or its payment in full. The Loan and Security Agreement contains customary representations, warranties, and events of default, as well as affirmative and negative covenants. As of March 31, 2021, the Company was in compliance with the loan covenants. The Company’s obligations under the Loan and Security Agreement are secured by substantially all of its assets (excluding intellectual property), subject to certain customary exceptions.
 
The debt obligation for borrowings made under the Loan and Security Agreement was as follows (in thousands of dollars):
 
 March 31, 2021December 31, 2020
Debt principal$ $ 
End-of-term debt obligation863 810 
Total debt obligation$863 $810 
 
As of March 31, 2021, the principal balance outstanding was one dollar. Future principal and end-of-term debt obligation payments under the Loan and Security Agreement are $1.2 million and due in 2022.  As of March 31, 2021 and December 31, 2020, the accrued interest payable under the Loan and Security Agreement was immaterial.
 
The end-of-term debt obligation accretes over the term of the Loan and Security Agreement until maturity and is included in interest expense in the Company's condensed consolidated statements of operations and comprehensive loss.
 
8. Stockholders’ Equity
 
Common Stock
 
The Company had reserved shares of common stock for issuance as follows:
 
 March 31, 2021December 31, 2020
Stock options and restricted stock units issued and outstanding4,965,510 4,867,303 
Stock options and restricted stock units available for grant under stock option plans4,851,806 3,061,589 
Common stock available for the Employee Stock Purchase Plan1,522,653 1,571,395 
Total11,339,969 9,500,287 

9. Income Taxes
 
The Company recorded an income tax benefit of $3.8 million for the three months ended March 31, 2021 and no income tax provision or benefit for the three months ended March 31, 2020. The income tax benefit for 2021 was primarily impacted by a discrete tax adjustment related to the release of certain valuation allowances on the Company's deferred tax assets upon recording of the deferred tax liabilities for the acquisition of Decipher Biosciences while 2020 had a full valuation allowance on all net deferred tax assets.

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

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

When used in this report, all references to "Veracyte," the "company," "we," "our" and "us" refer to Veracyte, Inc.
 
Veracyte, Afirma, Decipher, Percepta, Envisia, Prosigna, "Know by Design" and the Veracyte, Afirma, Decipher, Percepta, Envisia and Prosigna logos are registered trademarks in the U.S. and selected countries. We have common law rights and pending trademark applications for LymphMark and “More About You.” We also refer to trademarks of other corporations or organizations in this report.
 
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This report contains statistical data and estimates that we obtained from industry publications and reports. These publications typically indicate that they have obtained their information from sources they believe to be reliable, but do not guarantee the accuracy and completeness of their information. Some data contained in this report is also based on our internal estimates.

Overview
 
We are a global genomic diagnostics company that improves patient care by answering important clinical questions to inform diagnosis and treatment decisions throughout the patient journey in cancer and other diseases. Our growing menu of tests leverages advances in genomic science and machine learning technology to change care for patients, enabling them to avoid risky, costly procedures and accelerate time to more appropriate treatment. In addition to making our genomic tests available in the United States through our central laboratories, we believe our nCounter Analysis System is a best-in-class diagnostics platform that positions us to deliver our tests to patients worldwide through laboratories and hospitals that can perform them locally. With our acquisition of Decipher Biosciences in March 2021, we now have a presence in seven of the ten most common cancers in the United States and estimate that our current and near-term pipeline products address an estimated $12 billion global market. We believe our longer-term pipeline products will enable us to address an estimated $50 billion global market.
We design our tests to address specific unmet needs in the diagnosis, prognosis and treatment of cancer and other diseases to thus improve patient outcomes, while delivering clinical and economic utility to physicians, payers and the healthcare system. We position our tests to integrate seamlessly into the way physicians currently evaluate patients in order to facilitate adoption.

We develop our genomic tests using advanced scientific methods, such as RNA whole-transcriptome analysis and machine learning, and then optimize the assays and classifiers for the platform on which the test will be performed. Historically, we have utilized RNA sequencing methods performed in our Clinical Laboratory Improvement Amendments of 1988, or CLIA, certified laboratory in South San Francisco, California. Through the Decipher Biosciences acquisition, we now also have access to an additional 28,000 square foot office and College of American Pathologists, or CAP, accredited and CLIA-certified laboratory in San Diego. Beginning in 2021, we expect to adapt select tests to be performed on the nCounter Analysis System for international distribution of our tests.

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

We expect to continue expanding our offerings in our current indications, as well as in others that we believe will benefit from our technology and approach. Our product development pipelines address what we believe to be significant market opportunities in early detection, diagnosis, staging/prognosis, therapy selection/surgery and disease monitoring across the aforementioned indications. We plan to commercially introduce multiple products in 2021: Our Percepta Nasal Swab test for early lung cancer detection and our Percepta Genomic Atlas, which, together with the Percepta GSC, form a comprehensive lung cancer portfolio that we believe may improve lung cancer diagnosis and treatment decisions; our Envisia classifier on the nCounter system for expansion into global markets; and our Decipher Bladder test, which we believe will be the only genomic subtyping tool available to physicians in the United States treating patients with locally advanced bladder cancer. We plan to expand commercialization of the Decipher Bladder test upon receiving final Medicare coverage for the test, which we expect to occur in mid-2021.
 
We believe our powerful scientific platform provides multiple vectors to create value for patients, providers, payers and biopharmaceutical partners, as well as stockholders:

Unique Biorepositories – Our novel biorepositories fuel both our new biomarker discovery for future product development and our biopharmaceutical partnerships. When we develop new genomic classifiers, we build extensive, robust biorepositories of patient-consented samples and well-curated clinical, radiological, outcome and other information from Institutional Review Board-approved clinical trials to inform our discovery and validation efforts. Our biorepositories are designed to encompass the broad spectrum of disease that our tests may encounter when used
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in clinical practice, as well as the wide range of conditions associated with patients who are suspected of having a particular disease or disease state. We extract extensive genomic information from these patient samples using our RNA whole-transcriptome sequencing platform. We also generate valuable data through our commercial testing channel, where we similarly extract RNA whole-transcriptome information on each patient sample, prior to applying our proprietary algorithms. We estimate that our biorepositories contain over four billion transcripts from over 20,000 patient samples through our research and development efforts and more than 40 billion transcripts from over 200,000 patient samples through our commercial stream.

In addition, our Decipher GRID database contains whole-transcriptome profiles from over 90,000 patient tumors in urologic cancers, forming what we believe is the largest database of its kind in the world. Among these, approximately 15,000 patient profiles have extensive clinical characterization and outcome data. The Decipher GRID contains over 300 proprietary signatures that are run on each patient's tumor, with data analyzed and stored as part of our daily commercial operations.

Proprietary Technology and Bioinformatics - For biomarker discovery and product development, we utilize machine learning to select the genomic, clinical or other features from our biorepository that best distinguish the condition we are trying to identify. This enables us to develop high-performing genomic classifiers that can answer specific clinical questions. In addition, our bioinformatics pipelines are built to extract genomic variant content from the same assay to inform therapeutic selection.

High-Performing Commercial Genomic Tests - The majority of our genomic tests serve large, generally untapped markets where they are changing the diagnostic and treatment paradigm for patients. Our Prosigna and Decipher Prostate tests serve the highly competitive breast cancer and prostate cancer markets, respectively, where we believe they offer unique benefits to physicians and their patients. The majority of our genomic testing business stems from our CLIA-certified laboratories in South San Francisco and San Diego, California, which serve the United States market. We believe the nCounter Analysis System affords us the opportunity to adapt our test menu for multiple markets globally, providing flexibility for a global distributed testing model and increased efficiency in our United States-based CLIA labs. Our RNA sequencing platform enables us to offer testing from our CLIA labs for a broad range of gene alterations, which can inform treatment decisions at the time of diagnosis.
 
We believe our ability to leverage RNA whole-transcriptome sequencing and other data in large biorepositories of patient-consented samples in oncology and other indications, our strong commercial position in major clinical indications and our global reach, present partnership opportunities for biopharmaceutical companies to enhance their research and development capabilities and for other genomic diagnostics companies to introduce their non-competitive tests to global markets on the nCounter system.

We have formed several biopharmaceutical partnerships, each focused on our current indications to derive value out of our current business or advance future business. Our collaboration with the Lung Cancer Initiative at Johnson & Johnson, which began in December 2018, has helped advance our pipeline, including the launch in 2019 of our Percepta GSC on our RNA whole-transcriptome sequencing platform and development of the first non-invasive nasal swab test designed for early lung cancer detection. We recently expanded our program with Johnson & Johnson to potentially develop future tests designed to detect lung disease before cancer develops. Other biopharmaceutical partnerships include Acerta Pharma, the hematology research and development arm of AstraZeneca, related to our LymphMark lymphoma subtyping test and we are currently supporting pharmaceutical companies in urological clinical trials, including SPARTAN, a pivotal clinical trial of ERLEADA, which has been approved by the FDA and is marketed by Janssen for the treatment of nmCRPC, as well as clinical trials being conducted by Astellas and Dendreon in localized prostate cancer, and our tests are being used in the NCI-sponsored ERADICATE and PREDICT-RT trials.

Patients access our tests through their physician. Our Afirma, Percepta and Envisia tests are used as part of the diagnostic process and genomic testing services are performed in our CLIA laboratory located in South San Francisco, California. Our Decipher tests in urologic cancers are performed in our CLIA laboratory in San Diego, California. All of these tests are marketed as laboratory developed tests. Cytopathology services for Afirma testing are performed in our reference laboratory in Austin, Texas. The Prosigna test is indicated in female breast cancer patients who have undergone surgery in conjunction with locoregional treatment consistent with standard of care. This FDA cleared in vitro diagnostic test is performed on the nCounter Analysis System in laboratories worldwide, as well as in the United States.

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Impact of COVID-19
 
In December 2019, a strain of coronavirus was reported in Wuhan, China, and began to spread globally, including to the United States and Europe, in the following months. The full impact of the COVID-19 outbreak continues to be inherently uncertain at the time of this report. Our customers, third-party contract manufacturers, suppliers and collaboration partners have been affected by the closure of hospitals, doctors' offices, manufacturing sites, or country borders, among other measures put in place around the world. Layoffs and furloughs in the medical industry and otherwise during the shutdown have had, and will continue to have, negative impact on the demand for medical care and diagnostic tests, which affects the frequency with which tests are prescribed, and the ability of doctors and hospitals to administer such tests. Further the inability to travel and conduct face-to-face meetings can also make it more difficult to expand utilization of our products into new geographies and to drive awareness of our products. These circumstances had a significant negative impact on our financial results during 2020.
 
During the second half of March 2020, we experienced a significant decline in the volume of samples received. Our monthly reported genomic volumes reached a year-to-date low point in April 2020. Following the April 2020 low point, sequential monthly total reported genomic volume increased in May and June 2020. Our Afirma business rebounded first, as expected, given that approximately half of patient samples come to us from community physician practices. Our pulmonology business continues to grow, but more slowly, as predicted, since the bronchoscopy procedures used to collect samples for our Percepta and Envisia tests are performed in hospital settings that continue to be more restrictive. As a result of the impact on our volumes, we reported a significant decline in sequential and year-over-year revenue for the quarter ended June 30, 2020. For the second half of 2020, our total reported genomic volume, relative to the same period of the prior year, increased 3% as hospitals started performing more non-emergency procedures and physician practices began to reopen. The COVID-19 pandemic has also caused us to modify our business practices, including taking proactive steps to protect our employees and the broader community (including but not limited to curtailing or modifying employee travel, moving to full remote work wherever possible, and cancelling physical participation in meetings, events and conferences), while ensuring our ability to deliver genomic test results to physicians and their patients who need them.
 
During 2020, with limited physical access to physicians, we expanded our use of digital tools to engage with our customers. Given the effectiveness and efficiency of these programs, we continue to expand our digital marketing efforts even as we gain more access to our customers.
 
The rapid increase in daily COVID-19 testing consumes reagents and supplies otherwise available to genomic testing companies like ours across the United States. In October 2020, we experienced supply chain disruptions in the supply of plastic materials used in the processing of samples. When not limited by the expiration date of products and when we feel it reasonable and feasible to do so, we are taking steps to increase our level of stock reserves, to develop alternative sources of supply and to implement procedures to mitigate the impact on our supply chain or our ability to process samples in our laboratories.  Though we are in regular contact with our key suppliers, we do not have, nor expect to have, the necessary insight into our vendors’ supply chain issues that we may need to know to effectively mitigate the impact to our business. Though we attempt to mitigate the impact to our business, these interruptions in manufacturing (including the sourcing of reagents or supplies) may negatively impact our test volumes or levels of revenue.
 
The extent of the impact of the COVID-19 on our future liquidity and operational performance will depend on certain developments, including the deployment and long-term efficacy of vaccines, the duration and spread of the outbreak, the impact on our customers' operations and the impact to our sales and renewal cycles. See Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.

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First Quarter 2021 Financial Results
 
For the three months ended March 31, 2021, compared to the prior year (Decipher Biosciences one-time acquisition-related expenses in the first quarter of 2021 increased our operating expenses, net loss and net cash used in operations by $35.1 million and our net loss per share by $0.55):
 
Total Revenue was $36.7 million, including $3.8 million for urologic cancer testing, an increase of 18%;
Gross Margin was 66%;
Operating Expenses were $82.1 million. Operating Expenses, Excluding Cost of Revenue, were $69.7 million, including $35.1 million related to the acquisition of Decipher Biosciences;
Net Loss and Comprehensive Loss was $41.9 million, including $35.1 million of expenses related to the acquisition of Decipher Biosciences;
Basic and Diluted Net Loss Per Common Share was $0.66, including $0.55 per share attributable to the acquisition related expenses recorded in general and administrative expenses;
Net Cash Used in Operating Activities was $40.6 million; and
Cash and Cash Equivalents were $324.1 million at March 31, 2021.


First Quarter 2021 and Recent Business Highlights
 
Commercial Growth: 
Total genomic testing and product revenue was $36.1 million, an increase of 19%, compared to the first quarter of 2020.
Total genomic volume was 14,437 tests, an increase of 11%, compared to prior year, including 1,560 tests from Decipher Biosciences.
Continue to expect a mid-year Medicare coverage decision for Decipher Bladder test, which will allow us to leverage our urology sales footprint to accelerate commercial adoption.
Launched General Manager-based global structure, vertically aligning commercial teams within each clinical indication to provide enhanced focus and clinical expertise. Also added key new hires in marketing, managed care and international market access to support multiple new product launches and global expansion later this year.

Evidence Development and Pipeline Advancement:
Six abstracts for our pulmonology products accepted as posters at the American Thoracic Society, or ATS, 2021 International Conference this month:
Percepta Genomic Atlas – New data demonstrating the test’s ability to inform treatment decisions on the same sample used in diagnosis, in anticipation for product launch in Q4 2021.
Envisia – New data from five abstracts demonstrates the test’s clinical utility and our ability to enable the CLIA lab-based test on the nCounter Analysis System, in anticipation of the test’s international launch later this year.
Six abstracts for our oncology tests accepted for the ASCO Annual Meeting in June, including:
Percepta Nasal Swab – Pivotal, multicenter, double-blind clinical validation data for test to enable early lung cancer detection, setting the stage for anticipated product launch in the second half of 2021.
Decipher Prostate – Two abstracts, including an oral presentation showing test’s ability to identify African American men with higher likelihood of aggressive prostate cancer, will help further distinguish Decipher Prostate from other prostate cancer genomic tests.
Afirma XA – New data demonstrate the test’s ability to identify patients with gene alterations who may benefit from targeted therapies – at the time of diagnosis.
Two abstracts presented as posters at the European Society of Medical Oncology, or ESMO, Breast Cancer Virtual Congress 2021 meeting this month highlighted potential applications of the PAM50 biomarker on which the Prosigna test is based, as well as initial results from the PROCURE study, which aims to develop consensus around the use of breast cancer genomic tests, including Prosigna.
First patient enrolled and randomized in a study using Veracyte’s LymphMark lymphoma subtyping test to identify and enroll patients with untreated DLBCL who may benefit from Acerta Pharma and AstraZeneca’s Calquence® in combination with a traditional chemoimmunotherapy regimen.

Financing: 
Issued and sold 8,547,297 shares of common stock in February 2021, including 1,114,864 shares sold upon full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $74.00 per share. The net proceeds to Veracyte from the offering were approximately $593.8 million.
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Veracyte used a portion of the net proceeds from the offering, together with its existing cash and cash equivalents, to finance its $600 million cash acquisition of Decipher, which was completed in March 2021. The company intends to use the remaining net proceeds of the offering for working capital and other general corporate purposes, which may include acquiring or investing in complementary businesses, technologies or other assets.

Factors Affecting Our Performance
 
Reported Genomic Test Volume
 
Our performance depends on the number of genomic tests that we perform and report as completed in our CLIA-certified laboratories and Prosigna tests processed on the nCounter Analysis System. Factors impacting the number of tests that we report as completed include, but are not limited to:
 
the impact of COVID-19 on patients seeking to have tests performed;
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 to perform our tests and report the results;
the seasonality inherent in our business, such as the impact of work days per period, timing of industry conferences and the 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.

We generate substantially all our revenue from genomic testing services, including the rendering of a cytopathology diagnosis as part of the Afirma solution. For the Afirma classifier, we do not accrue revenue for approximately 5% - 10% of the tests that we perform and report as complete due principally to insufficient RNA from which to render a result and tests performed for which we do not reasonably expect to be paid.
 
Continued Adoption of and Reimbursement for our Products
 
Revenue growth depends on our ability to secure coverage decisions, achieve broader reimbursement at increased levels 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. To drive increased adoption of our products, we increased our sales force and marketing efforts over the last several years. 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, 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.
 
Integrating acquired assets and advances to our collaborations
 
Revenue growth, operational results and advances to our business strategy depends on our ability to integrate any acquired assets into our existing business. The integration of acquired assets may impact our revenue growth, increase the cost of operations, cause significant write-offs of intangible assets, or may require management resources that otherwise would be available for ongoing development of our existing business. The integration of assets acquired from NanoString in December 2019 and Decipher Biosciences in March 2021 may impact our revenue and operating results through integration of a sales force, development of a product supply operation and the expansion of our business internationally with a broad menu of advanced genomic tests that may be offered.
 
Revenue growth or reimbursement from our collaborations depends on our ability to deliver services or information and achieve milestones required from our collaborative partners. Our collaboration partners pay us for the provision of data, other services and the achievement of milestones. Under a collaboration with Johnson & Johnson in 2018, we provided data
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services required under this agreement in 2019 and 2020; however, there remains $9.0 million of revenue associated with development and commercialization milestones yet to be achieved.

How We Recognize Revenue
 
Testing Revenue
 
We recognize testing revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers, or ASC 606. Most of our revenue is generated from the provision of diagnostic testing services. These services are completed upon the delivery of test results to the prescribing physician, at which time we bill for the services. We recognize revenue related to billings on an accrual basis 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 the 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.
  
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.
 
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 calculate the average reimbursement from our products from all payers, for tests that are on average a year old, since it can take a significant period of time to collect from some payers. Except in situations where we believe the rate we reasonably expect to collect to vary due to a coverage decision, contract, more recent reimbursement data or evidence to the contrary, we use an average of reimbursement for tests provided over four quarters as it reduces the effects of temporary volatility and seasonal effects. Thus, the average reimbursement per product represents the total cash collected to date against genomic classifier tests, including variants, performed during the relevant period divided by the number of these tests performed during that same period.
 
The average genomic classifier 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
 
We began recognizing product revenue in December 2019 in accordance with the provisions of ASC 606 when we executed an agreement with NanoString for the exclusive worldwide license to the nCounter Analysis System for in vitro diagnostic use.
 
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
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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.
 
Our products consist of the Prosigna breast cancer assay, the nCounter Analysis System and related diagnostic kits. Revenues are presented net of the taxes that are collected from customers and remitted to governmental authorities.

Biopharmaceutical and Collaboration Revenues
 
From time to time, we enter into arrangements to license or provide access to our assets or services, including testing services, clinical and medical services, research and development and other services. Such arrangements may require us to deliver various rights, data, services, access and/or testing services to partner biopharmaceutical companies. The underlying terms of these arrangements generally provide for consideration paid to us in the form of nonrefundable fees, 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 revenue. Certain milestone payments fall under the scope of ASC Topic 808, Collaborative Arrangements, or ASC 808, and are classified under collaboration revenue. Payments received that are not sales or services to a customer or collaboration revenue are recorded as offsets against research and development expense in our consolidated statements of operations and comprehensive loss.

In arrangements involving more than one performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects 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 selling price on a stand-alone basis is not available.

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

Development of Additional Tests
 
We continue to advance our portfolio of diagnostic tests that leverage innovations in genomic science, sequencing technology and machine learning; our robust biorepositories; and our exclusive diagnostics rights to the nCounter Analysis System to further improve patient care globally.

Our Afirma GSC and Xpression Atlas, or XA, provide physicians with a comprehensive solution for thyroid nodule diagnosis. In May 2017, we introduced the Afirma GSC, supported by rigorous clinical validation data showing that the RNA sequencing-based test can help significantly more patients avoid unnecessary surgery in thyroid cancer diagnosis, compared to the original Afirma classifier. The Afirma GSC was developed with RNA whole-transcriptome sequencing and machine learning and helps identify patients with benign thyroid nodules among those with indeterminate cytopathology. For those with suspected thyroid cancer, the Afirma Xpression Atlas provides physicians with genomic alteration content from the same fine needle aspiration samples that are used in Afirma GSC testing and may help physicians decide with greater confidence on the surgical or therapeutic pathway for their patients.

We launched the original Afirma XA in March 2018. We subsequently introduced an expanded Afirma XA in April 2020 to provide physicians with additional gene alteration content – including novel or rare NTRK, ALK, RET and BRAF fusions – to further inform surgery and treatment decisions for patients with suspected or confirmed thyroid cancer. The expanded Afirma XA now reports 905 DNA variants and 235 RNA fusion partners in 593 genes.

Our Afirma GSC, including the BRAF v600E mutation test and medullary thyroid cancer, or MTC, Classifier, along with the Afirma XA offer a comprehensive solution for physicians evaluating thyroid nodules. Our broad ability to serve the thyroid diagnostic market also enables us to enter into research collaborations with biopharmaceutical companies, which are intended to support their development of targeted therapies for genetically defined cancers, including thyroid cancer.

In pulmonology, our Percepta Genomic Sequencing Classifier, or GSC, improves lung cancer diagnosis following an inconclusive bronchoscopy by identifying patients with lung nodules who are at low risk of cancer and may avoid further,
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invasive procedures and those with a high risk of lung cancer, so they may obtain faster diagnosis and treatment. The test is built upon foundational "field of injury" science - through which genomic changes associated with lung cancer in current and former smokers can be identified with a simple brushing of a person's airway - without the need to sample the often hard-to-reach nodule directly. We commercially introduced the Percepta classifier in 2015, with clinical validation data subsequently published in the New England Journal of Medicine. In June 2019, we launched the next-generation Percepta test, providing expanded lung cancer risk information to further inform treatment decisions. The Percepta classifier is the first product of its kind to be available commercially and the first to obtain Medicare coverage for improved lung cancer diagnosis.

We are currently leveraging the same “field of injury” technology that powers our Percepta classifier to develop a first-of-its-kind, noninvasive nasal swab test that can enable earlier lung cancer diagnosis and ultimately, we believe, help reduce lung cancer deaths. In December 2020, we announced preliminary, cross-validation performance data for our nasal swab classifier showing that the novel genomic test could identify with a high degree of accuracy patients whose lung nodules were high risk for cancer, so they could obtain prompt diagnosis and potential treatment, and patients with low risk of cancer so they could be monitored noninvasively. We are also developing the Percepta Atlas, which – similar to the Afirma XA – is intended to inform treatment decisions by detecting gene alterations in small samples collected at the time of diagnosis. We plan to introduce the nasal swab test and the Percepta Atlas commercially in the United States during the second half of 2021, rounding out our comprehensive lung cancer portfolio designed to answer important clinical questions throughout the patient journey. We plan to complete the development of the nasal swab test on the nCounter instrument for regulatory submission internationally by the end of 2022.

Additionally, our Envisia Genomic Classifier, launched in October 2016, is the first commercial test to improve the diagnosis of IPF among patients with a suspected interstitial lung disease. The Envisia test is also covered for Medicare patients. We are adapting our Envisia classifier for use on the nCounter system so that the test may be offered to physicians and patients in international markets by hospitals and laboratories that will perform the test locally. We expect to introduce the test before the end of 2021.

Further, our LymphMark test is in development for use on the nCounter platform as an aid in disease characterization and prognosis to support disease management for patients newly diagnosed with diffuse large B-cell lymphoma, or DLBCL. The LymphMark test utilizes gene-expression profiling of RNA extracted from formalin-fixed paraffin-embedded tissue to classify the “cell of origin” subtype of DLBCL tumors.

In 2015, Decipher Biosciences received a Local Coverage Determination, or LCD, for its first commercial product, Decipher Prostate RP, for use in the early salvage setting. Decipher Biosciences expanded into biopsy and received an LCD for first two Decipher Prostate Biopsy products in May 2019 covering the Very Low and Low National Comprehensive Cancer Network, or NCCN, risk groups and a second LCD in January 2020 covering Decipher Prostate Biopsy for Favorable Intermediate and Unfavorable Intermediate NCCN risk groups. In November 2020, Decipher Biosciences received another expanded LCD and launched its High and Very High biopsy product and now covers the entire localized and biochemically recurrent prostate cancer care continuum. The current product development pipeline that we acquired from Decipher Biosciences now includes expansion of indications for testing to castrate-resistant and metastatic prostate cancer, predictive biomarkers for response to Androgen Deprivation Therapy, or ADT, second generation AR signaling inhibitors, or ARSi, and docetaxel chemotherapy.

Decipher has also developed Decipher Bladder; we plan to expand commercialization of the test upon receiving final Medicare coverage for the test, which is expected in mid-2021. We believe Decipher Bladder will be one of the first genomic tests for localized bladder cancer.
 
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 to secure clinical samples that can be used in discovery and product development, as well as clinical validation studies. The timing of these research and development activities is difficult to predict, as is the timing of 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.

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Financial Overview
 
Revenue
 
Through March 31, 2021, we had derived most of our revenue from the sale of Afirma, 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,
 20212020
Medicare27 %25 %
UnitedHealthcare11 %11 %
 38 %36 %
 
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 Revenue
 
The components of our cost of testing revenue are laboratory expenses, sample collection kit costs, sample collection expenses, compensation expense, license fees and royalties, depreciation and amortization, other expenses such as equipment and laboratory supplies, and allocations of facility and information technology expenses. Costs associated with performing tests are 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 from automation, process efficiencies 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 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.
 
Our cost of product revenue consists primarily of costs of purchasing instruments and diagnostic 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.
 
Our cost of biopharmaceutical revenue are the costs of performing activities under arrangements that require us to perform research and development services on behalf of a customer pursuant to a biopharmaceutical service agreement, and is mainly comprised of compensation expense and pass through costs.
 
Research and Development
 
Research and development expenses include expenses incurred to develop our technology, collect clinical samples and conduct clinical studies to develop and support our products and pipeline. These expenses consist of compensation expenses, direct research and development expenses such as prototype materials, laboratory supplies and costs associated with setting up
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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 expect to incur significant research and development expenses as we continue to invest in research and development activities related to developing additional products and evaluating various platforms. We incurred a majority of our research and development expenses in support of our pipeline products in 2020 and in the three months ended March 31, 2021, and expect this to continue in the remainder of 2021 and beyond.
 
Selling and Marketing
 
Selling and marketing expenses consist of compensation expenses, direct marketing expenses, professional fees, other expenses such as travel and communications costs and allocation of facility and information technology expenses. We have expanded our internal sales force as we invest in our multi-product sales strategy to assign a single point of contact to successfully develop and implement relationships with our customers and increased our marketing spending. We have also incurred increased selling and marketing expense as a result of investments in our lung product portfolio and believe total selling and marketing expenses will continue to increase as we launch and promote our new tests.
 
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 and miscellaneous expenses offset by allocation of facility and information technology expenses to other functions. For the three months ended March 31, 2021, costs related to the acquisition of Decipher Biosciences were included in general and administrative compensation expense and professional fees. For the three months ended March 31, 2021, approximately 56% of the average headcount classified as general and administrative encompass our billing and customer care teams. We expect general and administrative expenses to continue to increase as we build our general and administration infrastructure and to stabilize thereafter.
 
Intangible Asset Amortization
 
Our finite-lived intangible assets, acquired in business combinations, are being amortized over 5 to 15 years, using the straight-line method. Amortization expense is expected to be approximately $12.9 million in 2021, approximately $14.8 million per year through 2024 and decrease thereafter.
 
Interest Expense
 
Interest expense is attributable to our borrowings under debt agreements and costs associated with the prepayment of debt.
 
Other (Loss) Income, Net
 
Other (loss) income, net consists primarily of realized and unrealized gains and losses on foreign currency transactions and interest income from our cash held in interest bearing accounts.

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Results of Operations
 
Comparison of the three months ended March 31, 2021 and 2020 (in thousands of dollars, except percentages and test volume):
 
 Three Months Ended March 31,
 20212020Change%
Revenue:    
Testing revenue$33,078 $26,991 $6,087 23%
Product revenue3,059 3,409 (350)(10)%
Biopharmaceutical revenue566 722 (156)(22)%
Total revenue36,703 31,122 5,581 18 %
Operating expense:    
Cost of testing revenue10,832 10,568 264 2%
Cost of product revenue1,490 1,559 (69)(4)%
Cost of biopharmaceutical revenue81 116 (35)(30)%
Research and development5,336 4,407 929 21%
Selling and marketing16,296 17,584 (1,288)(7)%
General and administrative46,282 7,813 38,469 492%
Intangible asset amortization1,801 1,275 526 41%
Total operating expenses82,118 43,322 38,796 90%
Loss from operations(45,415)(12,200)(33,215)272%
Interest expense(53)(55)(4)%
Other (loss) income, net(195)539 (734)(136)%
Loss before income tax benefit(45,663)(11,716)(33,947)290%
Income tax benefit(3,795)— (3,795)NA
Net loss and comprehensive loss$(41,868)$(11,716)$(30,152)257%
Other Operating Data:    
Genomic classifiers reported12,303 10,559 1,744 17%
Product tests sold2,134 2,482 (348)(14)%
Total test volume14,437 13,041 1,396 11%
Depreciation and amortization expense$2,550 $1,972 $578 29%
Stock-based compensation expense$3,855 $2,905 $950 33%
 
Revenue
 
Revenue increased $5.6 million for the three months ended March 31, 2021 compared to the same period in 2020. This was primarily due to a $6.1 million increase in testing revenue from a 17% increase in our Afirma, Percepta, Envisia Decipher Prostate Biopsy and Decipher Prostate RP genomic classifiers partially offset by a $0.4 million decrease of sales of Prosigna. Genomic classifiers reported for the three months ended March 31, 2021 includes 1,560 of Decipher Prostate Biopsy and Decipher Prostate RP genomic classifiers following our acquisition of Decipher Biosciences on March 12, 2021, which contributed $3.8 million of revenue during the three months ended March 31, 2021. Biopharmaceutical revenue decreased $0.2 million and consisted of $0.6 million and $0.7 million for development services for the three months ended March 31, 2021 and 2020, respectively.
 
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Cost of revenue
 
Comparison of the three months ended March 31, 2021 and 2020 is as follows (in thousands of dollars, except percentages):
 
 Three Months Ended March 31,
 20212020Change%
Cost of testing revenue:    
Laboratory costs$5,753 $6,220 $(467)(8)%
Sample collection costs1,207 1,221 (14)(1)%
Compensation expense2,335 1,815 520 29 %
License fees and royalties64 14 50 357 %
Depreciation and amortization271 253 18 %
Other expenses439 434 %
Allocations763 611 152 25 %
Total$10,832 $10,568 $264 %
Cost of product revenue:    
Product costs$1,196 $1,220 $(24)(2)%
License fees and royalties275 339 (64)(19)%
Depreciation and amortization19 — 19 NM
Total$1,490 $1,559 $(69)(4)%
Cost of biopharmaceutical revenue: