0001384101-23-000067.txt : 20230505 0001384101-23-000067.hdr.sgml : 20230505 20230505080727 ACCESSION NUMBER: 0001384101-23-000067 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 56 CONFORMED PERIOD OF REPORT: 20230331 FILED AS OF DATE: 20230505 DATE AS OF CHANGE: 20230505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERACYTE, INC. CENTRAL INDEX KEY: 0001384101 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MEDICAL LABORATORIES [8071] IRS NUMBER: 205455398 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36156 FILM NUMBER: 23891371 BUSINESS ADDRESS: STREET 1: 6000 SHORELINE COURT, SUITE 300 CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: (650) 243-6300 MAIL ADDRESS: STREET 1: 6000 SHORELINE COURT, SUITE 300 CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 FORMER COMPANY: FORMER CONFORMED NAME: CALDEROME INC DATE OF NAME CHANGE: 20061219 10-Q 1 vcyt-20230331.htm 10-Q vcyt-20230331
0001384101false--12-31Q12023http://fasb.org/us-gaap/2022#PensionPlansDefinedBenefitMemberhttp://fasb.org/us-gaap/2022#PensionPlansDefinedBenefitMemberhttp://fasb.org/us-gaap/2022#PropertyPlantAndEquipmentAndFinanceLeaseRightOfUseAssetAfterAccumulatedDepreciationAndAmortizationhttp://fasb.org/us-gaap/2022#PropertyPlantAndEquipmentAndFinanceLeaseRightOfUseAssetAfterAccumulatedDepreciationAndAmortizationhttp://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrenthttp://fasb.org/us-gaap/2022#OtherLiabilitiesNoncurrent00013841012023-01-012023-03-3100013841012023-05-01xbrli:shares00013841012023-03-31iso4217:USD00013841012022-12-31iso4217:USDxbrli:shares0001384101vcyt:TestingMember2023-01-012023-03-310001384101vcyt:TestingMember2022-01-012022-03-310001384101us-gaap:ProductMember2023-01-012023-03-310001384101us-gaap:ProductMember2022-01-012022-03-310001384101vcyt:BiopharmaceuticalAndOtherMember2023-01-012023-03-310001384101vcyt:BiopharmaceuticalAndOtherMember2022-01-012022-03-3100013841012022-01-012022-03-310001384101us-gaap:CommonStockMember2022-12-310001384101us-gaap:AdditionalPaidInCapitalMember2022-12-310001384101us-gaap:RetainedEarningsMember2022-12-310001384101us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-12-310001384101us-gaap:CommonStockMember2023-01-012023-03-310001384101us-gaap:AdditionalPaidInCapitalMember2023-01-012023-03-310001384101us-gaap:RetainedEarningsMember2023-01-012023-03-310001384101us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-01-012023-03-310001384101us-gaap:CommonStockMember2023-03-310001384101us-gaap:AdditionalPaidInCapitalMember2023-03-310001384101us-gaap:RetainedEarningsMember2023-03-310001384101us-gaap:AccumulatedOtherComprehensiveIncomeMember2023-03-310001384101us-gaap:CommonStockMember2021-12-310001384101us-gaap:AdditionalPaidInCapitalMember2021-12-310001384101us-gaap:RetainedEarningsMember2021-12-310001384101us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-12-3100013841012021-12-310001384101us-gaap:CommonStockMember2022-01-012022-03-310001384101us-gaap:AdditionalPaidInCapitalMember2022-01-012022-03-310001384101us-gaap:RetainedEarningsMember2022-01-012022-03-310001384101us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-01-012022-03-310001384101us-gaap:CommonStockMember2022-03-310001384101us-gaap:AdditionalPaidInCapitalMember2022-03-310001384101us-gaap:RetainedEarningsMember2022-03-310001384101us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-03-3100013841012022-03-31vcyt:segment0001384101us-gaap:SalesRevenueNetMembervcyt:MedicareMemberus-gaap:CustomerConcentrationRiskMember2023-01-012023-03-31xbrli:pure0001384101us-gaap:SalesRevenueNetMembervcyt:MedicareMemberus-gaap:CustomerConcentrationRiskMember2022-01-012022-03-310001384101us-gaap:SalesRevenueNetMembervcyt:UnitedHealthcareMemberus-gaap:CustomerConcentrationRiskMember2023-01-012023-03-310001384101us-gaap:SalesRevenueNetMembervcyt:UnitedHealthcareMemberus-gaap:CustomerConcentrationRiskMember2022-01-012022-03-310001384101us-gaap:SalesRevenueNetMembervcyt:MajorCustomersMemberus-gaap:CustomerConcentrationRiskMember2023-01-012023-03-310001384101us-gaap:SalesRevenueNetMembervcyt:MajorCustomersMemberus-gaap:CustomerConcentrationRiskMember2022-01-012022-03-310001384101vcyt:MedicareMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:AccountsReceivableMember2023-01-012023-03-310001384101vcyt:MedicareMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:AccountsReceivableMember2022-01-012022-12-310001384101vcyt:UnitedHealthcareMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:AccountsReceivableMember2023-01-012023-03-310001384101vcyt:UnitedHealthcareMemberus-gaap:CustomerConcentrationRiskMemberus-gaap:AccountsReceivableMember2022-01-012022-12-310001384101vcyt:BiopharmaceuticalAndOtherMember2023-03-310001384101vcyt:BiopharmaceuticalAndOtherMember2022-12-310001384101vcyt:BiopharmaceuticalAndOtherBiopharmaceuticalRevenueMember2023-01-012023-03-310001384101vcyt:BiopharmaceuticalAndOtherBiopharmaceuticalRevenueMember2022-01-012022-03-310001384101vcyt:BiopharmaceuticalAndOtherContractManufacturingAndTestingMember2023-01-012023-03-310001384101vcyt:BiopharmaceuticalAndOtherContractManufacturingAndTestingMember2022-01-012022-03-3100013841012022-01-012022-12-310001384101vcyt:EmployeeAndNonEmployeeStockOptionMember2023-01-012023-03-310001384101vcyt:EmployeeAndNonEmployeeStockOptionMember2022-01-012022-03-310001384101us-gaap:EmployeeStockMember2023-01-012023-03-310001384101us-gaap:EmployeeStockMember2022-01-012022-03-310001384101us-gaap:RestrictedStockUnitsRSUMember2023-01-012023-03-310001384101us-gaap:RestrictedStockUnitsRSUMember2022-01-012022-03-310001384101vcyt:PerceptaProductTechnologyMember2023-03-310001384101vcyt:PerceptaProductTechnologyMember2022-12-310001384101vcyt:PerceptaProductTechnologyMember2023-01-012023-03-310001384101vcyt:DevelopedProductTechnologyMember2023-03-310001384101vcyt:DevelopedProductTechnologyMember2022-12-310001384101vcyt:DevelopedProductTechnologyMember2023-01-012023-03-310001384101vcyt:ProsignaCustomerRelationshipsMember2023-03-310001384101vcyt:ProsignaCustomerRelationshipsMember2022-12-310001384101vcyt:ProsignaCustomerRelationshipsMember2023-01-012023-03-310001384101vcyt:NCounterDxLicenseMember2023-03-310001384101vcyt:NCounterDxLicenseMember2022-12-310001384101vcyt:NCounterDxLicenseMember2023-01-012023-03-310001384101vcyt:LymphmarkProductTechnologyMember2023-03-310001384101vcyt:LymphmarkProductTechnologyMember2022-12-310001384101vcyt:LymphmarkProductTechnologyMember2023-01-012023-03-310001384101vcyt:DecipherBioSciencesProductTechnologyMember2023-03-310001384101vcyt:DecipherBioSciencesProductTechnologyMember2022-12-310001384101vcyt:DecipherBioSciencesProductTechnologyMember2023-01-012023-03-310001384101vcyt:DecipherBiosciencesTradeNamesMember2023-03-310001384101vcyt:DecipherBiosciencesTradeNamesMember2022-12-310001384101vcyt:DecipherBiosciencesTradeNamesMember2023-01-012023-03-310001384101vcyt:HalioDXDevelopedTechnologyMember2023-03-310001384101vcyt:HalioDXDevelopedTechnologyMember2022-12-310001384101vcyt:HalioDXDevelopedTechnologyMember2023-01-012023-03-310001384101vcyt:HalioDxCustomerRelationshipsMember2023-03-310001384101vcyt:HalioDxCustomerRelationshipsMember2022-12-310001384101vcyt:HalioDxCustomerRelationshipsMember2023-01-012023-03-310001384101vcyt:HalioDxCustomerBacklogMember2023-03-310001384101vcyt:HalioDxCustomerBacklogMember2022-12-310001384101vcyt:HalioDxCustomerBacklogMember2023-01-012023-03-310001384101us-gaap:MoneyMarketFundsMember2023-03-310001384101us-gaap:MoneyMarketFundsMember2022-12-310001384101vcyt:HeadquartersAndLaboratoryFacilitiesSouthSanFranciscoMember2023-03-310001384101vcyt:HeadquartersAndLaboratoryFacilitiesSouthSanFranciscoMember2022-12-310001384101vcyt:NanostringMember2019-12-032019-12-030001384101us-gaap:CommonStockMembervcyt:NanostringMember2019-12-032019-12-030001384101vcyt:NanostringMember2019-12-030001384101vcyt:NanostringMember2023-03-310001384101vcyt:NanostringMember2022-12-310001384101vcyt:NanostringMember2023-01-012023-03-310001384101vcyt:NanostringMember2022-01-012022-03-310001384101us-gaap:MeasurementInputDiscountRateMember2023-03-310001384101us-gaap:MeasurementInputDiscountRateMember2022-12-310001384101vcyt:MeasurementInputProbabilityOfAchievementMembersrt:MinimumMember2023-03-310001384101srt:MaximumMembervcyt:MeasurementInputProbabilityOfAchievementMember2023-03-310001384101srt:WeightedAverageMembervcyt:MeasurementInputProbabilityOfAchievementMember2023-03-310001384101vcyt:MeasurementInputProbabilityOfAchievementMembersrt:MinimumMember2022-12-310001384101srt:MaximumMembervcyt:MeasurementInputProbabilityOfAchievementMember2022-12-310001384101srt:WeightedAverageMembervcyt:MeasurementInputProbabilityOfAchievementMember2022-12-310001384101vcyt:HeadquartersAndLaboratoryFacilitiesSouthSanFranciscoAndSanDiegoCaliforniaAustinTexasMarseilleFranceAndRichmondVirginiaMember2023-03-310001384101vcyt:FacilitiesInMarseilleFranceMember2023-03-310001384101vcyt:EmployeeAndNonEmployeeStockOptionMember2023-03-310001384101vcyt:EmployeeAndNonEmployeeStockOptionMember2022-12-310001384101us-gaap:EmployeeStockMember2023-03-310001384101us-gaap:EmployeeStockMember2022-12-31

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, 2023
OR 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to            
 
Commission file number 001-36156
VERACYTE, INC.
(Exact name of registrant as specified in its charter)
Delaware 20-5455398
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
 
6000 Shoreline Court, Suite 300
South San Francisco, California 94080
(Address of principal executive offices, zip code)
 
(650)  243-6300
(Registrant’s telephone number, including area code)
  
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value, $0.001 per shareVCYTThe Nasdaq Stock Market LLC
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
 


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company 
  Emerging growth company 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No x
 
As of May 1, 2023, there were 72,417,156 shares of common stock, par value $0.001 per share, outstanding.




VERACYTE, INC.
INDEX
 
 Page
No.
 
 


i

VERACYTE, INC.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

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


ii

PART I. — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements-(Unaudited)

VERACYTE, INC. 
Condensed Consolidated Balance Sheets 
(unaudited)
(In thousands, except share and par value amounts)
 
 March 31, 2023December 31, 2022
  (See Note 1)
Assets  
Current assets:  
Cash and cash equivalents$177,890 $154,247 
Short-term investments 24,605 
Accounts receivable45,489 44,021 
Supplies and inventory13,306 14,294 
Prepaid expenses and other current assets14,818 11,469 
Total current assets251,503 248,636 
Property, plant and equipment, net18,072 17,702 
Right-of-use assets, operating leases11,308 13,160 
Intangible assets, net170,226 174,866 
Goodwill699,718 695,891 
Restricted cash749 749 
Other assets5,543 5,418 
Total assets$1,157,119 $1,156,422 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$15,655 $11,911 
Accrued liabilities30,641 37,774 
Current portion of deferred revenue2,194 2,613 
Current portion of acquisition-related contingent consideration3,300 6,060 
Current portion of operating lease liabilities4,076 4,070 
Current portion of other liabilities127 186 
Total current liabilities55,993 62,614 
Deferred tax liabilities4,594 4,531 
Acquisition-related contingent consideration, net of current portion4,773 2,498 
Operating lease liabilities, net of current portion9,709 10,648 
Other liabilities791 931 
Total liabilities75,860 81,222 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding as of March 31, 2023 and December 31, 2022
  
Common stock, $0.001 par value; 125,000,000 shares authorized, 72,383,140 and 71,959,454 shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively
72 72 
Additional paid-in capital1,509,861 1,500,191 
Accumulated deficit(401,808)(393,717)
Accumulated other comprehensive loss(26,866)(31,346)
Total stockholders’ equity1,081,259 1,075,200 
Total liabilities and stockholders’ equity$1,157,119 $1,156,422 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
1

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

 Three Months Ended March 31,
 20232022
Revenue:  
Testing revenue$72,396 $55,980 
Product revenue3,892 2,979 
Biopharmaceutical and other revenue6,134 8,824 
Total revenue82,422 67,783 
Operating expenses:
Cost of testing revenue19,648 17,523 
Cost of product revenue2,162 1,575 
Cost of biopharmaceutical and other revenue4,419 4,615 
Research and development12,769 9,166 
Selling and marketing26,130 23,754 
General and administrative22,463 20,912 
Intangible asset amortization5,329 5,486 
Total operating expenses92,920 83,031 
Loss from operations(10,498)(15,248)
Other income, net2,407 784 
Loss before income taxes(8,091)(14,464)
Income tax benefit (3)
Net loss$(8,091)$(14,461)
Net loss per common share, basic and diluted$(0.11)$(0.20)
Shares used to compute net loss per common share, basic and diluted72,175,457 71,229,672 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

2

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

 Three Months Ended March 31,
 20232022
Net loss$(8,091)$(14,461)
Other comprehensive income (loss):
Change in currency translation adjustments4,480 (5,598)
Net comprehensive loss$(3,611)$(20,059)
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

VERACYTE, INC.
Condensed Consolidated Statements of Stockholders' Equity
(Unaudited)
(In thousands)
 
 Common StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal
Stockholders'
Equity
 SharesAmount
Balance at December 31, 202271,959 $72 $1,500,191 $(393,717)$(31,346)$1,075,200 
Issuance of common stock on exercise of stock options and vesting of restricted stock units332 — 1,988 — — 1,988 
Issuance of common stock under employee stock purchase plan (ESPP)92 — 1,974 — — 1,974 
Tax portion of vested restricted stock units— — (2,277)— — (2,277)
Stock-based compensation expense (employee)— — 7,612 — — 7,612 
Stock-based compensation expense (ESPP)— — 373 — — 373 
Net loss— — — (8,091)— (8,091)
Other comprehensive income— — — — 4,480 4,480 
Balance at March 31, 202372,383 $72 $1,509,861 $(401,808)$(26,866)$1,081,259 

 Common StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated Other Comprehensive LossTotal
Stockholders'
Equity
 SharesAmount
Balance at December 31, 202171,123 $71 $1,468,683 $(357,157)$(15,083)$1,096,514 
Issuance of common stock on exercise of stock options and vesting of restricted stock units228 — 1,422 — — 1,422 
Issuance of common stock under ESPP82 — 2,115 — — 2,115 
Tax portion of vested restricted stock units— — (1,447)— — (1,447)
Stock-based compensation expense (employee)— — 6,230 — — 6,230 
Stock-based compensation expense (non-employee)— — 11 — — 11 
Stock-based compensation expense (ESPP)— — 404 — — 404 
Net loss— — — (14,461)— (14,461)
Other comprehensive loss— — — — (5,598)(5,598)
Balance at March 31, 202271,433 $71 $1,477,418 $(371,618)$(20,681)$1,085,190 

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

4

VERACYTE, INC.  
Condensed Consolidated Statements of Cash Flows 
(Unaudited) 
(In thousands)
 Three Months Ended March 31,
 20232022
Operating activities  
Net loss$(8,091)$(14,461)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization6,670 6,556 
Loss on disposal of property, plant and equipment121  
Stock-based compensation7,985 6,645 
Benefit from income taxes (3)
Interest on end-of-term debt obligation 53 
Noncash lease expense903 587 
Revaluation of acquisition-related contingent consideration(485)31 
Effect of foreign currency on operations(224)131 
Impairment loss1,410  
Changes in operating assets and liabilities:
Accounts receivable(1,302)(3,575)
Supplies and inventory1,055 (1,201)
Prepaid expenses and other current assets(3,064)(2,139)
Other assets(491)451 
Operating lease liabilities(950)(597)
Accounts payable2,012 (960)
Accrued liabilities and deferred revenue(7,721)(390)
Net cash used in operating activities(2,172)(8,872)
Investing activities
Purchase of short-term investments(19,700) 
Proceeds from sale of short-term investments39,773  
Proceeds from maturity of short-term investments5,000  
Purchases of property, plant and equipment(993)(2,453)
Net cash provided by (used in) investing activities24,080 (2,453)
Financing activities
Payment of long-term debt (100)
Payment of taxes on vested restricted stock units(2,277)(1,447)
Proceeds from the exercise of common stock options and employee stock purchases3,962 3,537 
Net cash provided by financing activities1,685 1,990 
Increase (decrease) in cash, cash equivalents and restricted cash23,593 (9,335)
Effect of foreign currency on cash, cash equivalents and restricted cash50 (247)
Net increase (decrease) in cash, cash equivalents and restricted cash23,643 (9,582)
Cash, cash equivalents and restricted cash at beginning of period154,996 173,946 
Cash, cash equivalents and restricted cash at end of period$178,639 $164,364 
Supplementary cash flow information:
Purchases of property, plant and equipment included in accounts payable and accrued liability$1,624 $342 
Cash, Cash Equivalents and Restricted Cash:
 March 31, 2023December 31, 2022
Cash and cash equivalents$177,890 $154,247 
Restricted cash749 749 
Total cash, cash equivalents and restricted cash$178,639 $154,996 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

VERACYTE, INC.
Notes to Financial Statements
(unaudited)

1. Organization, Description of Business and Summary of Significant Accounting Policies
 
Veracyte, Inc., or Veracyte, or the Company, is a global diagnostics company that empowers clinicians with the high-value insights they need to guide and assure patients at pivotal moments in the race to diagnose and treat cancer. Veracyte's high-performing tests enable clinicians to make more confident diagnostic, prognostic and treatment decisions, helping patients avoid unnecessary procedures and interventions, and speed time to appropriate treatment, thereby improving outcomes for patients all over the world.

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

The Company currently offers tests in thyroid cancer (Afirma); prostate cancer (Decipher Prostate); breast cancer (Prosigna); interstitial lung diseases (Envisia); and bladder cancer (Decipher Bladder). The Company’s Percepta Nasal Swab test is being run in its CLIA lab in support of clinical studies and its tests for kidney cancer and lymphoma are in development, the latter as a companion diagnostic.

The Company serves global markets with two complementary models. In the United States, it offers laboratory developed tests, or LDTs, through its centralized, Clinical Laboratory Improvement Amendments of 1988, or CLIA, certified laboratories in South San Francisco and San Diego, California, supported by its cytopathology expertise in Austin, Texas. Additionally, primarily outside of the United States, the Company provides its Prosigna test to patients through distribution to laboratories and hospitals that can perform the tests locally as an in vitro diagnostic, or IVD, test that runs on the nCounter Analysis System.

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, 2023, the condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022, the condensed consolidated statements of comprehensive loss for the three months ended March 31, 2023 and 2022, the condensed consolidated statements of stockholders' equity for the three months ended March 31, 2023 and 2022, and the condensed consolidated statements of cash flows for the three months ended March 31, 2023 and 2022 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of its financial position, operating results, stockholders' equity and cash flows for the periods presented. The condensed consolidated balance sheet as of December 31, 2022 has been derived from audited financial statements. The results for the three months ended March 31, 2023 are not indicative of the results expected for the full year or any other period. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company operates in one segment.
 
The accompanying interim period condensed consolidated financial statements and related financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
 
Use of Estimates
 
The preparation of unaudited interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items subject to such estimates include: revenue recognition; the useful lives of property, plant and equipment; the recoverability of long-lived assets; the incremental borrowing rates for leases; accounting for acquisitions; the estimation of the fair value of intangible assets and contingent consideration; stock based compensation; income tax uncertainties, including a valuation allowance for deferred tax assets; credit related losses on investments; and allowance for credit losses and contingencies. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions
6

VERACYTE, INC.
Notes to Financial Statements
(unaudited)
that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions.

Concentrations of Credit Risk and Other Risks and Uncertainties
 
The worldwide spread of coronavirus, or COVID-19, has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have. As a result, the ultimate impact of COVID-19 and the extent to which COVID-19 impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict. If the financial markets or the overall economy are impacted for an extended period, the Company’s liquidity, revenue, supplies, goodwill and intangibles may be adversely affected. The Company considers the effects, to the extent knowable, of the COVID-19 pandemic in developing its estimates.
 
The majority of the Company’s cash and cash equivalents are deposited with two major financial institutions in the United States. Deposits in these institutions may exceed the amount of insurance provided on such deposits. The Company has not realized any losses on its deposits of cash and cash equivalents other than exchange rate losses related to foreign currency denominated accounts.
 
Several of the components of the Company’s sample collection kits and test reagents, and the nCounter 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, or are unable to provide the Company with reagents that perform to specifications, the Company could suffer delays in being able to deliver its diagnostic solutions, suffer a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results.
 
Through March 31, 2023, the Company has derived most of its revenue from the sale of Decipher and Afirma testing. To date, Decipher and Afirma testing have been delivered primarily to physicians in the United States.

The Company is also subject to credit risk from its accounts receivable related to its sales. Credit risk for accounts receivable from testing revenue is incorporated in testing revenue accrual rates as the Company assesses historical collection rates and current developments to determine accrual rates and amounts the Company will ultimately collect. The Company generally does not perform evaluations of customers’ financial condition for testing revenue and generally does not require collateral. The Company assesses credit risk and the amount of accounts receivable the Company will ultimately collect for product, biopharmaceutical and other revenue based on collection history, current developments and credit worthiness of the customer. The estimate of credit losses is not material at March 31, 2023.

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,
 20232022
Medicare31 %30 %
UnitedHealthcare10 %9 %
 41 %39 %

The Company's significant third-party payers in excess of 10% of total accounts receivable and their related accounts receivable balance as a percentage of total accounts receivable were as follows:
 
 March 31, 2023December 31, 2022
Medicare13 %14 %
UnitedHealthcare10 %10 %

7

VERACYTE, INC.
Notes to Financial Statements
(unaudited)
Cash and Cash Equivalents
 
The Company considers demand deposits in a bank, money market funds and highly liquid investments with an original maturity of 90 days or less to be cash equivalents.

Short-Term Investments
 
The Company's short-term investments consist of U.S. treasury securities with maturities at the time of purchase that were between 90 days and one year. The Company classifies these investments as held-to-maturity debt securities, which are reported at amortized cost. The amortization of discounts or premiums from the purchase of the securities are recognized as a component of interest income in other income (loss), net in the condensed consolidated statements of operations. Investments are initially recorded net of an allowance for expected credit losses, if any, which are remeasured each period and any impairments are recognized as an expense. Unrealized gains and losses are not recognized in income. As of both March 31, 2023 and December 31, 2022, no allowances for expected credit losses had been recorded and there have been no impairment or credit losses on the Company's short term investments.

Restricted Cash
 
The Company had deposits of $0.7 million included in long-term assets as of both March 31, 2023 and December 31, 2022, restricted from withdrawal and held by banks in the form of collateral for irrevocable standby letters of credit held as security for the Company's leases.
 
Revenue Recognition
 
The Company recognizes revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers, or ASC 606. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. Performance obligations are considered satisfied once the Company has completed a service or transferred control of a product to the customer.

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

Testing Revenue

The Company bills for testing services at the time of test completion as defined by the delivery of test results. The Company recognizes revenue based on estimates of the amount that will ultimately be realized. In determining the amount to accrue for a delivered test, the Company considers factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. These estimates require significant judgment by management. Actual results could differ from those estimates and assumptions.
 
Product Revenue

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

VERACYTE, INC.
Notes to Financial Statements
(unaudited)
generally recognized when the instrument is ready for use by the end customer. Shipping and handling costs incurred for product shipments are included in product revenue. Revenue is presented net of the taxes that are collected from customers and remitted to governmental authorities.

Biopharmaceutical and Other Revenue

The Company enters into arrangements for biopharmaceutical research and development, commercialization, contract manufacturing and development, and testing services, which are classified under biopharmaceutical and other revenue. Such arrangements may require the Company to deliver various rights, manufactured diagnostic test kits, services and/or samples, including intellectual property rights/licenses, biopharmaceutical research and development services, and/or commercialization services. The Company receives consideration in the form of upfront license fees; payments on delivery of data, test results or manufactured products; costs of service plus margin; and development and commercial performance milestone payments.
The Company develops estimates and assumptions that require judgment to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligations. The estimation of the stand-alone selling price may include independent evidence of market price, forecasted revenue or costs, development timelines, discount rates, and probabilities of technical and regulatory success. The Company evaluates each performance obligation to determine if the obligation can be satisfied at a point in time or over time, and it measures the services delivered to the collaborative partner which are periodically reviewed based on the progress of the related program. For licenses that are bundled with other promises, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time. The effect of any change made to an estimated input component and, therefore revenue or expense recognized, would be recorded as a change in estimate. In addition, variable consideration must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

At the inception of each arrangement that includes milestone payments (variable consideration), the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price. Milestone payments that are not within either party’s control, such as non-operational developmental and regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each reporting period, the Company re-evaluates the probability of achievement of milestones that are within either party’s control, such as operational developmental milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenue and earnings in the period of adjustment. Revisions to the Company’s estimate of the transaction price may also result in negative revenue and earnings in the period of adjustment. One collaboration arrangement with milestone payments falls under the scope of ASC Topic 808, Collaborative Arrangements, or ASC 808. These milestone payments are recognized in the same manner as milestone payments from customers and are classified under biopharmaceutical and other revenue.

Accounts receivable from biopharmaceutical and other revenue was $8.8 million at March 31, 2023 and $9.3 million at December 31, 2022. There was $2.2 million and $2.6 million of deferred revenue related to these agreements at March 31, 2023 and December 31, 2022, respectively. Revenue included in biopharmaceutical and other revenue for the three months ended March 31, 2023 and 2022 was as follows (in thousands of dollars):

 Three Months Ended March 31,
 20232022
Biopharmaceutical revenue$4,447 $7,046 
Contract manufacturing and testing1,687 1,778 
Total$6,134 $8,824 

Cost of Testing Revenue
 
The components of the Company's cost of testing services are laboratory expenses, sample collection expenses, compensation expense, license fees and royalties, depreciation, other expenses such as equipment and laboratory supplies, and allocations of facility and information technology expenses. Costs associated with performing tests are expensed as the test is processed regardless of whether and when revenue is recognized with respect to that test.
 
9

VERACYTE, INC.
Notes to Financial Statements
(unaudited)
Cost of Product Revenue
 
Cost of product revenue consists primarily of costs of purchasing instruments and diagnostic kits from third-party contract manufacturers, installation, service and packaging and delivery costs, and the Company's internal labor expenses. In addition, cost of product includes royalty costs for licensed technologies included in the Company’s products. Cost of product revenue for instruments and diagnostic kits is recognized in the period the related revenue is recognized. Shipping and handling costs incurred for product shipments are included in cost of product in the condensed consolidated statements of operations.
 
Cost of Biopharmaceutical and Other Revenue
 
Cost of biopharmaceutical and other revenue consists of costs of performing activities under arrangements that require the Company to perform biopharmaceutical research and development, commercialization, contract manufacturing and contract testing services on behalf of a customer. 

Pension Liability

The Company offers a defined benefit pension plan to certain non-U.S. employees of its Veracyte SAS subsidiary. As of both March 31, 2023 and December 31, 2022, the total pension obligation was $0.7 million and is included in other liabilities on the condensed consolidated balance sheets.

Recent Accounting Pronouncements
 
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 2014-09, Revenue from Contracts with Customers (Topic 606). The update will generally result in an entity recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. The new standard is effective on a prospective basis for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted this guidance in 2023 and such adoption had no material impact on its consolidated financial statements and related disclosures.
 
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,
 20232022
Shares of common stock subject to outstanding options3,767,086 3,703,656 
Employee stock purchase plan33,998 30,622 
Restricted stock units2,349,151 1,559,540 
Total common stock equivalents6,150,235 5,293,818 

3. Balance Sheet Components

Goodwill

Goodwill was $699.7 million and $695.9 million as of March 31, 2023 and December 31, 2022, respectively. The changes in the carrying amounts of goodwill during the three months ended March 31, 2023 were due to foreign currency translation. The Company has not recorded any impairment related to goodwill.
10


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, 2023December 31, 2022Weighted Average Remaining Amortization Period (Years)
 Gross Carrying AmountAccumulated AmortizationNet Carrying AmountGross Carrying AmountAccumulated AmortizationNet Carrying Amount
Percepta product technology$16,000 $(8,533)$7,467 $16,000 $(8,267)$7,733 7
Prosigna product technology4,120 (915)3,205 4,120 (847)3,273 11
Prosigna customer relationships2,430 (1,620)810 2,430 (1,499)931 1
nCounter Dx license46,880 (10,418)36,462 46,880 (9,636)37,244 11
LymphMark product technology990 (471)519 990 (436)554 4
Decipher product technology90,000 (18,484)71,516 90,000 (16,234)73,766 8
Decipher trade names4,000 (1,643)2,357 4,000 (1,443)2,557 3
HalioDx developed technology40,400 (7,001)33,399 39,724 (5,899)33,825 8
HalioDx customer relationships4,680 (1,369)3,311 4,602 (1,144)3,458 5
HalioDx customer backlog6,639 (2,759)3,880 6,528 (2,303)4,225 2
Total finite-lived intangibles216,139 (53,213)162,926 215,274 (47,708)167,566 8.4
In-process research and development7,300 — 7,300 7,300 — 7,300 
Total intangible assets$223,439 $(53,213)$170,226 $222,574 $(47,708)$174,866 

Amortization of the finite-lived intangible assets is recognized on a straight-line basis. Amortization expense of $5.3 million and $5.5 million was recognized for the three months ended March 31, 2023 and 2022, respectively.
The estimated future aggregate amortization expense as of March 31, 2023 is as follows (in thousands of dollars):
Year Ending December 31,Amounts
2023 remainder of year$16,037 
202421,343 
202520,215 
202618,359 
202717,752 
Thereafter69,220 
Total$162,926 
 
Supplies and Inventory

As of March 31, 2023 and December 31, 2022, supplies and inventory consisted of $10.0 million and $10.2 million, respectively, of lab supplies and reagents consumed in the performance of testing services, and $3.3 million and $4.1 million, respectively, of inventory related to raw materials consumed in the contract manufacturing process, as well as finished and semi-finished components used in the assembly of diagnostic kits related to product sales.

11

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands of dollars):
 
 March 31, 2023December 31, 2022
Accrued compensation expenses$21,953 $30,637 
Accrued other8,688 7,137 
Total accrued liabilities$30,641 $37,774 


4. Fair Value Measurements

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

The carrying amounts of certain financial instruments of the Company, including cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The fair value of the Company’s financial assets includes money market funds and deposits for leases of the Company's facilities. Money market funds, included in cash and cash equivalents in the accompanying condensed consolidated balance sheets, were $42.3 million and $131.2 million as of March 31, 2023 and December 31, 2022, respectively, and are Level I assets as described above. The deposits for the leases, included in restricted cash, were $0.7 million as of both March 31, 2023 and December 31, 2022 and are a Level I assets as described above. There were no transfers between Levels 1, 2 or 3 for the three months ended March 31, 2023 and 2022.
 
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 first achievement or occurrence, by or on behalf of Veracyte, of the commercial launch of the first, second and third diagnostic tests for use on the nCounter multiplex analysis system. This contingency was valued at $6.1 million as of the acquisition date and is remeasured to fair value at each reporting date until the contingent consideration is settled. As of March 31, 2023 and December 31, 2022, this contingency was remeasured to $8.1 million and $8.6 million, respectively, with the corresponding changes included in general and administrative expense in the Company's condensed consolidated statements of operations. For the three months ended March 31, 2023, a reversal of expense of $0.5 million was recorded in general and administrative expense for the changes in carrying value and, for the three months ended March 31, 2022, no expense was recorded. As of March 31, 2023, the achievement of one of the milestones is forecasted to occur within the next 12 months. As a result, $3.3 million of the contingent consideration is included in short term liabilities at March 31, 2023. The fair value of the contingent consideration includes inputs that are not observable in the market and thus represents a Level III financial liability. The estimation of the fair value of the contingent consideration is based on the present value of the expected payments calculated by assessing the likelihood of when the related milestones would be achieved and estimating the Company's borrowing rate. These estimates form the basis for making judgments about the carrying value of the contingent consideration that are not readily apparent from other sources. Changes to the forecasts for the achievement of the milestones and the borrowing rate can significantly affect the estimated fair value of the
12

VERACYTE, INC.
Notes to Financial Statements
(unaudited)
contingent consideration. As of March 31, 2023 and December 31, 2022, the Company calculated the estimated fair value of the milestones using the following significant unobservable inputs:
 
Value or Range (Weighted-Average)
Unobservable inputMarch 31, 2023December 31, 2022
Discount rate7.6%8.3%
Probability of achievement
80% - 100% (92%)
80% - 100% (94%)
 
Short-Term Investments Held-to-Maturity

The Company's short-term investments consist of U.S. treasury securities with maturities at the time of purchase that were between 90 days and one year. The Company classifies these investments as held-to-maturity debt securities, which are reported at amortized cost, and are Level I assets as described above. As of March 31, 2023, the Company held no short-term investments and, as of December 31, 2022, short-term investments comprised U.S. treasury bills recorded at amortized cost of $24.6 million with a fair value of approximately $24.6 million. As of December 31, 2022, gross unrealized losses on short-term investments were insignificant. As part of its banking partner diversification efforts, the Company sold $40.0 million U.S. treasury bills with an amortized cost of $39.8 million for $39.8 million and realized a gross gain of $13 thousand during the three months ended March 31, 2023. No realized gains or losses on short-term investments were recognized in 2022.

5. Commitments and Contingencies
 
Operating Leases
 
The Company leases office and laboratory facilities in South San Francisco and San Diego, California; Austin, Texas; Marseille, France; and Richmond, Virginia, and leases certain equipment under various non-cancelable lease agreements. The lease terms extend to October 2030 and contain extension of lease terms and expansion options. The leases have a weighted average remaining lease term of 3.6 years as of March 31, 2023. The Company had deposits of $0.7 million included in long-term assets as of both March 31, 2023 and December 31, 2022 restricted from withdrawal and held by banks in the form of collateral for irrevocable standby letters of credit held as security for the leases.

The Company determined its operating lease liabilities using payments through their current expiration dates and a weighted average discount rate of 6.4% based on the rate that the Company would have to pay to borrow, on a collateralized basis, an amount equal to the lease payments in a similar economic environment. Operating lease liabilities along with the associated right-of-use assets are disclosed in the accompanying condensed consolidated balance sheets. After the adoption of ASC 842, Leases, or ASC 842, the Company classified its deferred rent for tenant improvements with its operating lease right-of-use assets on the consolidated balance sheets.
 
13

VERACYTE, INC.
Notes to Financial Statements
(unaudited)
Future minimum lease payments under non-cancelable operating leases as of March 31, 2023 are as follows (in thousands of dollars):
 
Year Ending December 31,Amounts
Remainder of 2023$3,551 
20244,449 
20254,491 
20261,405 
2027699 
Thereafter885 
Total future minimum lease payments15,480 
Less: amount representing interest1,695 
Present value of future lease payments13,785 
Less: short-term lease liabilities4,076 
Long-term lease liabilities$9,709 
 
The Company recognizes operating lease expense on a straight-line basis over the non-cancelable lease period. The following table summarizes operating lease expense and cash paid for amounts included in the measurement of lease liabilities (in thousands of dollars):

Three Months Ended March 31,
20232022
Operating lease expense$1,123 $1,054 
Cash paid for amounts included in the measurement of lease liabilities$1,177 $1,068 

The company has leased laboratory equipment under various financing leases. The total right-of-use assets and total financing lease liabilities for these financing leases were $0.2 million and $0.2 million, respectively, as of March 31, 2023, and are included in property, plant and equipment, net and other liabilities in the accompanying condensed consolidated balance sheets. As of December 31, 2022, the total right-of-use assets and total financing lease liabilities for these financing leases were $0.4 million and $0.4 million, respectively.

The Company’s wholly-owned foreign subsidiary has entered into an arrangement under which it expects to sign a lease agreement for facilities which will be constructed in Marseille, France. The lease will commence upon completion of the construction of the office building which the Company currently expects to occur in the third quarter of 2023 at which time the Company will record a lease liability and a corresponding ROU asset. The initial term of the lease will be twelve years with annual rent of approximately $1.3 million, which is subject to change based on final construction.
 
Contingencies
 
From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business. The Company believes there is no litigation pending that could have, either individually or in the aggregate, a material impact on the Company's consolidated financial statements.
 

 
14

6. Stockholders’ Equity
 
Common Stock
 
The Company had reserved shares of common stock for issuance as follows:
 
 March 31, 2023December 31, 2022
Stock options and restricted stock units issued and outstanding7,054,474 5,881,906 
Stock options and restricted stock units available for grant under stock option plans5,322,628 5,591,977 
Common stock available for the Employee Stock Purchase Plan1,242,954 1,335,353 
Total13,620,056 12,809,236 

7. Components of Other Income

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

 Three Months Ended March 31,
 20232022
French research tax credits$1,009 $892 
Interest income1,189 39 
Interest expense(7)(61)
Gain (loss) on currency revaluation229 (100)
Other(13)14 
 $2,407 $784 


8. Income Taxes
 
The Company recorded no income tax expense for the three months ended March 31, 2023 and an income tax benefit of $3.0 thousand for the three months ended March 31, 2022.

The Inflation Reduction Act of 2022 was signed into law August 16, 2022, and includes significant legislation addressing taxes, inflation, climate change and renewable energy incentives, and healthcare. Key tax provisions include a 15% corporate minimum tax, clean energy incentives, and a 1% excise tax on stock buybacks. The Company does not expect the provisions of such legislation to have any impact on the effective tax rate of the Company but will continue to evaluate the tax effects should any provisions become applicable to the Company.

15

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q.

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

When used in this report, all references to "Veracyte," the "company," "we," "our" and "us" refer to Veracyte, Inc., together with its consolidated subsidiaries, unless otherwise noted.
 
Veracyte, Afirma, Percepta, Envisia, Prosigna, Lymphmark, Decipher, GRID, HalioDx, Brightplex, Immunosign, and the Veracyte logo are registered trademarks of Veracyte, Inc. and its subsidiaries in the U.S. and selected countries. nCounter is the registered trademark of NanoString Technologies, Inc., or NanoString, in the U.S. and selected countries and used by Veracyte under license. Immunoscore is the registered trademark of Institut National de la Santé et de la Recherche Médicale, or Inserm, in the U.S. and selected countries and used by Veracyte under license.
 
Overview
 
We are a global diagnostics company that empowers clinicians with the high-value insights they need to guide and assure patients at pivotal moments in the race to diagnose and treat cancer. Our high-performing tests enable clinicians to make more confident diagnostic, prognostic and treatment decisions, helping patients avoid unnecessary procedures and interventions, and speed time to appropriate treatment, thereby improving outcomes for patients all over the world.
We currently offer tests in thyroid cancer (Afirma); prostate cancer (Decipher Prostate); breast cancer (Prosigna); interstitial lung diseases (Envisia); and bladder cancer (Decipher Bladder). Our Percepta Nasal Swab test is being run in our CLIA lab in support of clinical studies and our tests for kidney cancer and lymphoma are in development, the latter as a companion diagnostic.
We serve global markets with two complementary models. In the United States, we offer LDTs through our centralized CLIA certified laboratories in South San Francisco and San Diego, California, supported by our cytopathology expertise in Austin, Texas. Additionally, primarily outside of the United States, we provide tests to patients through distribution to laboratories and hospitals that can perform the tests locally. Today, this includes our Prosigna test, and in the future, we intend to offer the Envisia, Decipher Prostate and Percepta Nasal Swab tests as in IVD tests that run on the nCounter Analysis System. We believe our broad menu of advanced diagnostic tests, combined with our ability to deliver them globally, uniquely positions us in the diagnostics industry.

COVID-19 and Macroeconomic Factors

We believe the COVID-19 outbreak, including its numerous variants, impacted our total test volumes primarily during 2020 and 2021. Our customers, third-party contract manufacturers, carriers, 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, furloughs and unplanned loss of staff in the medical industry and otherwise during the pandemic have had, and will continue to have, negative impacts on the demand for and supply of medical care and diagnostic tests, which affects the frequency with which tests are ordered, 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.

Our Decipher Prostate test has been least impacted by the pandemic because our customers are mostly community-based urology practices, which generally remained more accessible to patients and our sales reps. Our Afirma thyroid cancer test was impacted by COVID-19 in 2020 and portions of 2021 as a majority of our samples come from large institutions which are less accessible to patients and our reps. We believe our pulmonology business was the most impacted since the bronchoscopy procedures used to collect samples for our Envisia test are considered elective procedures and are performed in hospital settings, which have been more restrictive. Further these tests are ordered by pulmonologists who may have been largely preoccupied with caring for COVID-19 patients.
16


In addition, ongoing interest rate increases and inflation in the U.S. and other markets globally and turmoil in the global banking and finance system may heighten the risk of an economic downturn or recession and volatility and dislocation in the capital or credit markets in the U.S. or globally. Moreover, the continued strengthening of the U.S. dollar compared to other currencies, has impacted and may continue to impact our results of operations. We intend to continue to monitor macroeconomic conditions closely and may determine to take certain financial or operational actions in response to such conditions as appropriate. Finally, the military conflict between Russia and Ukraine has increased the risk of disruptions to energy supplies in Europe, which may impact our ability to manufacture tests from our facility in Marseille, France.

The extent of the impact of COVID-19 and other macroeconomic factors 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 particularly in the form of more transmissible variants; the impact on our customers' operations; the impact to our sales and renewal cycles; changes in central bank policies and interest rates; rates of inflation; and changes in foreign currency exchange rates. See Risk Factors for further discussion.

Factors Affecting Our Performance
 
Reported Total Test Volume
 
Our performance depends on the number of tests that we perform and report as completed in our CLIA-certified laboratories and Prosigna tests 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 availability of hospital staff to perform and support procedures needed to collect samples for our tests;
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, including as a result of supply chain challenges;
the seasonality inherent in our business, such as the impact of work-days per period, timing of industry conferences and timing of when patient deductibles are exceeded, which also impacts the reimbursement we receive from insurers; and
our ability to obtain prior authorization or meet other requirements instituted by payers, benefit managers, or regulators necessary to be paid for our tests.

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

How We Recognize Revenue

We recognize revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers, or ASC 606. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied.  

17

Testing Revenue

We bill for testing services at the time of test completion as defined by the delivery of test results. We recognize revenue based on estimates of the amount that will ultimately be realized. In determining the amount to accrue for a delivered test, we consider factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and us, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. These estimates require significant judgment by management. Actual results could differ from those estimates and assumptions.

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

Product Revenue
 
Our products consist of the Prosigna breast cancer assay, the nCounter Analysis System and related diagnostic kits. We recognize product revenue when control of the promised goods is transferred to our customers, in an amount that reflects the consideration expected to be received in exchange for those products. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer, either on its own or together with other resources that are readily available to the customer, and is separately identified in the contract. Performance obligations are considered satisfied once we have transferred control of a product to the customer, meaning the customer has the ability to use and obtain the benefit of the product. We recognize product revenue for satisfied performance obligations only when there are no uncertainties regarding payment terms or transfer of control. Shipping and handling costs incurred for product shipments are charged to our customers and included in product revenue. Revenue is presented net of the taxes that are collected from customers and remitted to governmental authorities.

Biopharmaceutical and Other Revenue
 
We enter into arrangements to license or provide access to our assets or services, including testing services, clinical services, research and development, contract manufacturing and development, as well as other services. Such arrangements may require us to deliver various rights, data, services, manufactured diagnostic test kits, access and/or testing services to partner biopharmaceutical companies. One such arrangement is a collaborative arrangement that falls under the scope of ASC Topic 808, Collaborative Arrangements, or ASC 808. The underlying terms of these arrangements generally provide for consideration paid to us in the form of nonrefundable fees; payments on delivery of data, test results or manufactured products; costs of service plus margin; performance milestone payments; expense reimbursements and possibly royalty and/or other payments.
18

Net sales of data or other services to our customers are recognized in accordance with ASC 606 and are classified under biopharmaceutical and other revenue. Milestone payments which fall under the scope of ASC 808, are recognized in the same manner as milestone payments from customers and are considered to be collaboration revenue. Payments received that are not related to sales or services to a customer or collaboration revenue are recorded as offsets against research and development expense or cost of biopharmaceutical and other revenue in our consolidated statements of operations.

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

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

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

Financial Overview
 
Revenue
 
Through March 31, 2023, we had derived most of our revenue from the sale of Decipher and Afirma tests, delivered primarily to physicians in the United States. We generally invoice third-party payers upon delivery of a patient report to the prescribing physician. As such, we take the assignment of benefits and the risk of cash collection from the third-party payer and individual patients. Third-party payers and other customers in excess of 10% of total revenue and their related revenue as a percentage of total revenue were as follows:
 
 Three Months Ended March 31,
 20232022
Medicare31 %30 %
UnitedHealthcare10 %%
 41 %39 %
 
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
19

judgments underlying our estimated reimbursement change, our accrued revenue and financial results could be negatively impacted in future periods.
 
Cost of Testing Revenue
 
The components of our cost of testing revenue are laboratory expenses, sample collection kit costs, sample collection expenses, compensation expense, license fees and royalties, depreciation, other expenses such as equipment and laboratory supplies, and allocations of facility and information technology expenses. Costs associated with performing tests are 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.

Cost of Product Revenue

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.

Cost of Biopharmaceutical and Other Revenue
 
Our cost of biopharmaceutical and other revenue are the costs of performing activities under arrangements that require us to perform research and development, commercialization, contract manufacturing and development, and contract testing services on behalf of a customer. This cost is mainly composed of compensation expense, laboratory supplies 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 laboratory supplies and costs associated with setting up and conducting clinical studies at domestic and international sites, professional fees, depreciation and amortization, other miscellaneous expenses and allocation of facility and information technology expenses. We expense all research and development costs in the periods in which they are incurred. We incurred a majority of our research and development expenses in 2022 and in the three months ended March 31, 2023 in support of our early-stage products, including Percepta Nasal Swab. Going forward, we expect to incur significant expense as we invest in the development of our innovation engine, early-stage products, including required clinical studies, the development of current tests for the nCounter instrument and the transition of manufacturing to our Veracyte Marseille facility.
 
Selling and Marketing
 
Selling and marketing expenses consist of compensation expenses, direct marketing expenses, professional fees, other expenses such as travel and communications costs, as well as allocation of facility and information technology expenses. Our sales team of approximately 120 representatives is organized by business unit, with separate teams calling on thyroid cancer, urologic cancers, and pulmonology physicians. The business units have dedicated marketing support, as well as a marketing operations team that serves the commercial organization broadly. Prosigna sales outside of the U.S. are led by country managers that call on laboratories and breast cancer oncologists and have dedicated marketing support.
 
General and Administrative
 
General and administrative expenses include compensation expenses for executive officers and administrative, billing and client service personnel, professional fees for legal and audit services, occupancy costs, depreciation and amortization, and
20

other expenses such as information technology and miscellaneous expenses, offset by allocation of facility and information technology expenses to other functions. General and administrative expenses include costs related to the acquisitions of Decipher Biosciences and HalioDx, which were included in general and administrative compensation expense and professional fees. We expect general and administrative expenses to continue to increase as we build our infrastructure to scale revenue growth, and to stabilize thereafter.
 
Intangible Asset Amortization
 
Our finite-lived intangible assets, acquired in business combinations, are being amortized over 4 to 15 years, using the straight-line method. Amortization expense is expected to be approximately $21.3 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 Income (Loss), Net
 
Other income (loss), net consists primarily of realized and unrealized gains and losses on foreign currency transactions, French research tax credits, interest expense on our debt and interest income from our cash held in interest bearing accounts. The French research tax credits (crédit d’impôt recherche or CIR) are generated by our wholly-owned subsidiary, Veracyte SAS, in connection with its research efforts performed in Marseille, France.

Foreign Currency Translation

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

21

Results of Operations
 
Comparison of the three months ended March 31, 2023 and 2022 (in thousands of dollars, except percentages and test volume):
 
 Three Months Ended March 31,
 20232022Change%
Revenue:    
Testing revenue$72,396 $55,980 $16,416 29%
Product revenue3,892 2,979 913 31%
Biopharmaceutical and other revenue6,134 8,824 (2,690)(30)%
Total revenue82,422 67,783 14,639 22%
Operating expense:    
Cost of testing revenue19,648 17,523 2,125 12%
Cost of product revenue2,162 1,575 587 37%
Cost of biopharmaceutical and other revenue4,419 4,615 (196)(4)%
Research and development12,769 9,166 3,603 39%
Selling and marketing26,130 23,754 2,376 10%
General and administrative22,463 20,912 1,551 7%
Intangible asset amortization5,329 5,486 (157)(3)%
Total operating expenses92,920 83,031 9,889 12%
Loss from operations(10,498)(15,248)4,750 (31)%
Other income, net2,407 784 1,623 207%
Loss before income taxes(8,091)(14,464)6,373 (44)%
Income tax benefit— (3)(100)%
Net loss$(8,091)$(14,461)$6,370 (44)%
Other Operating Data:    
Diagnostic tests reported25,848 21,039 4,809 23%
Product tests sold2,940 2,206 734 33%
Total test volume28,788 23,245 5,543 24%
Depreciation and amortization expense$6,670 $6,556 $114 2%
Stock-based compensation expense$8,101 $6,855 $1,246 18%
 
Revenue
 
Revenue increased $14.6 million for the three months ended March 31, 2023 compared to the same period in 2022. This was primarily due to a $16.4 million increase in testing revenue driven by a 23% volume increase, partially offset by a $2.7 million decrease in our Biopharmaceutical and other revenue. The increase in testing revenue and tests reported for the three months ended March 31, 2023 was due to Afirma and Decipher Prostate tests, which contributed $16.8 million of the increase. The remaining testing business decreased by $0.4 million primarily due to our decision to discontinue our Immunoscore test and to stop actively marketing our Percepta GSC tests. Product revenue increased $0.9 million for the three months ended March 31, 2023 compared to the same period in 2022, driven primarily by an increase in product test kits sold. This growth was partially offset by a decline in currency exchange rates, which negatively impacted product revenue by $0.1 million. Biopharmaceutical and other revenue primarily decreased by $2.7 million for the three months ended March 31, 2023 driven primarily by the reduction of customer projects given overall spending constraints across the industry. Currency exchange rates negatively impacted our total revenue by $0.3 million for the three months ended March 31, 2023 when compared to rates for the same period in 2022, primarily related to our Biopharmaceutical and other revenue.

22

Cost of revenue
 
Comparison of the three months ended March 31, 2023 and 2022 is as follows (in thousands of dollars, except percentages):
 
 Three Months Ended March 31,
 20232022Change%
Cost of testing revenue:    
Laboratory costs$10,362 $8,730 $1,632 19 %
Sample collection costs2,515 1,967 548 28 %
Compensation expense4,247 3,966 281 %
License fees and royalties22 379 (357)(94)%
Depreciation and amortization309 327 (18)(6)%
Other expenses699 941 (242)(26)%
Allocations1,494 1,213 281 23 %
Total$19,648 $17,523 $2,125 12 %
Cost of product revenue:    
Product costs$1,634 $1,207 $427 35 %
License fees and royalties362 274 88 32 %
Depreciation and amortization43 19 24 126 %
Other expenses123 66 57 86 %
Allocations— (9)(100)%
Total$2,162 $1,575 $587 37 %
Cost of biopharmaceutical and other revenue:    
Compensation expense$2,286 $2,337 $(51)(2)%
License fees and royalties21 26 (5)(19)%
Depreciation and amortization113 93 20 22 %
Other expenses1,896 2,110 (214)(10)%
Allocations103 49 54 110 %
Total$4,419 $4,615 $(196)(4)%
 
Cost of testing revenue increased $2.1 million, or 12%, for the three months ended March 31, 2023 compared to the same period in 2022. The increase in cost of testing revenue was due to increased volume in testing, primarily related to Afirma and Decipher Prostate.

Cost of product revenue is related to sales of Prosigna and nCounter Analysis Systems. Cost of product revenue increased $0.6 million, or 37%, for the three months ended March 31, 2023 compared to the same period in 2022, driven by increased test volume. This was partially offset by a $0.1 million currency exchange impact.

Cost of biopharmaceutical and other revenue includes labor costs incurred by our employees working on customer projects, laboratory supplies and pass-through expenses incurred on these projects. Cost of biopharmaceutical and other revenue decreased by $0.2 million driven by reduction of variable expenses related to projects, including a $0.1 million favorable currency exchange impact when compared to rates for the three months ended March 31, 2022.

23

Research and development
 
Comparison of the three months ended March 31, 2023 and 2022 is as follows (in thousands of dollars, except percentages):
 
 Three Months Ended March 31,
 20232022Change%
Research and development expense:    
Compensation expense$7,301 $7,125 $176 %
Direct research and development expense2,741 822 1,919 233 %
Depreciation and amortization163 114 49 43 %
Other expenses1,724 527 1,197 227 %
Allocations840 578 262 45 %
Total$12,769 $9,166 $3,603 39 %
 
Research and development expense increased $3.6 million, or 39%, for the three months ended March 31, 2023 compared to the same period in 2022. The increase in compensation expense was primarily due to annual merit increases. The increase in direct research and development expense was primarily related to our on-going clinical studies including, but not limited to, furthering the support and evidence of our Percepta Nasal Swab test. The increase in other expenses was primarily driven by increased support in developing our IVD platform. We recognized a $0.1 million favorable impact from foreign currency exchange when compared to the rates for the three months ended March 31, 2022.

Selling and marketing