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 , theVeracyte logo,HalioDx , Decipher, Decipher GRID, Afirma, Percepta, Envisia, Prosigna, LymphMark, Immunoscore, TMExplore, Brightplex, Immunosign, "Know by Design" and "More about You" are registered trademarks ofVeracyte, Inc. and its subsidiaries in theU.S. and selected countries. nCounter is the registered trademark of NanoString Technologies, Inc., or NanoString, in theU.S. and selected countries and used byVeracyte under license.
Overview
We are a global diagnostics company that improves patient care by answering important clinical questions to inform diagnosis and treatment decisions throughout the patient journey in cancer and other diseases. Our growing menu of tests leverages advances in molecular science and machine learning technology to improve care for patients, enabling them to avoid risky, costly procedures and interventions, and reduce time to appropriate treatment.
In addition to making our tests available in
We develop tests that address significant unmet clinical needs in the diagnosis, prognosis and treatment of cancer and other diseases. We deploy a comprehensive strategic planning approach that broadly examines the clinical care spectrum in areas where our unique approach and expertise may potentially benefit physicians, patients and payers. In each disease area, our medical affairs and research teams focus intensely on understanding the patient journey and analyzing critical points of clinical decision-making, where having better information can impact what happens next for the patient. Our extensive team of research, bioinformatics and clinical professionals rely on deep scientific expertise and an extensive network of practicing physicians and key opinion leaders, or KOLs, to help inform new product development. This includes determining what clinical question each test should answer, where it should be positioned in the patient work-up and what sample type and technology should be used. We develop our molecular tests using advanced scientific methods, such as RNA whole-transcriptome sequencing and machine learning.Veracyte's tests are purposefully designed to integrate easily into current physician protocols, delivering clinical utility and economic value to physicians, payers, and the healthcare system. We currently offer tests in thyroid cancer (Afirma); prostate cancer (Decipher Prostate); breast cancer (Prosigna); lung cancer (Percepta); interstitial lung diseases (Envisia); bladder cancer (Decipher Bladder); and colon cancer (Immunoscore). Our tests for kidney cancer and lymphoma are in development, the latter as a companion diagnostic. We serve global markets with two complementary and inter-related models. Inthe United States , we offer laboratory developed tests, or LDTs, which we perform in our centralized, CLIA-certified laboratories inSouth San Francisco andSan Diego, California , andRichmond, Virginia , supported by our cytopathology expertise in ourAustin, Texas CLIA lab. In addition, outside ofthe United States , we intend to offer our tests as in vitro diagnostic, or IVD, tests that run on the nCounter Analysis System by laboratories that perform them for physicians and their patients locally. We believe our broad menu of advanced diagnostic tests, combined with our ability to deliver them globally, uniquely positions us in the diagnostics sector. In the process of developing leading diagnostics across the oncology market, we have collected a significant number of patient samples and proprietary data related to various cancer types. We combine these assets with our robust machine learning core competency to further enhance our research and clinical development capabilities, as well as build opportunities with biopharmaceutical and other partners. 20 -------------------------------------------------------------------------------- Table of Contents InMarch 2021 ,Veracyte acquired Decipher Biosciences, expanding our genomic testing menu into urologic cancers. The acquisition also providedVeracyte with Decipher GRID (Genomic Resource for Intelligent Discovery), a platform and database that helps drive biopharmaceutical partnerships, KOL engagement and pipeline development in urologic cancers. InAugust 2021 , we acquiredHalioDx , giving us the capabilities and expertise to manufacture our own IVD test kits for use on the nCounter Analysis System. The acquisition also deepened our scientific expertise and capabilities in the rapidly growing area of immuno-oncology, further strengthening our offerings for biopharmaceutical and other partners.
Impact of COVID-19
We believe the COVID-19 outbreak, including its numerous variants, has 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 (due to vaccination status or other reasons) 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 has been the most impacted since the bronchoscopy procedures used to collect samples for our Percepta and Envisia tests are considered elective procedures and are performed in hospital settings, which have been more restrictive, and these tests are ordered by pulmonologists who could be largely preoccupied with caring for COVID-19 patients. The rapid increase in daily COVID-19 testing consumes reagents and supplies otherwise available to diagnostic testing companies like ours acrossthe United States . 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 manage our level of stock reserves, develop alternative sources of supply and implement procedures to mitigate the impact on our supply chain and 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 total test volumes or levels of revenue. The extent of the impact of 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 particularly in the form of more transmissible variants; 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.
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; 21 -------------------------------------------------------------------------------- Table of Contents •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.
Integrating Acquired Assets and Advancing 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 Decipher Biosciences inMarch 2021 andHalioDx inAugust 2021 may impact our revenue and operating results as we integrate various functions.
Revenue growth from our biopharmaceutical and IVD contract manufacturing partners depends on our ability to deliver services, information and/or achieve milestones.
How We Recognize Revenue We recognize revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers, or ASC 606. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied.
Testing Revenue
We bill for testing services at the time of test completion as defined by the delivery of test results. We recognize revenue based on estimates of the amount that will ultimately be realized. In determining the amount to accrue for a delivered test, we consider factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and us, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. These estimates require significant judgment by management. Actual results could differ from those estimates and assumptions. Generally, cash we receive is collected within 12 months of the date the test is billed. We cannot provide any assurance as to when, if ever, or to what extent any of these amounts will be collected. Notwithstanding our efforts to obtain payment for these tests, payers may deny our claims, in whole or in part, and we may never receive payment for these tests. 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. 22 -------------------------------------------------------------------------------- Table of Contents Generally, we calculate the average reimbursement from our products from all payers, for tests that are on average a year old, as 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 tests performed during the relevant period divided by the number of these tests performed during that same period. 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. 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. 23 -------------------------------------------------------------------------------- Table of Contents 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 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 ThroughJune 30, 2022 , we had derived most of our revenue from the sale of the Decipher urologic tests and Afirma, delivered primarily to physicians inthe 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 June 30, Six Months Ended June 30, 2022 2021 2022 2021 Medicare 30 % 34 % 30 % 31 % UnitedHealthcare 10 % 10 % 10 % 10 % 40 % 44 % 40 % 41 % For tests performed, we recognize the related revenue upon delivery of a patient report to the prescribing physician based on the amount that we expect to ultimately receive. In determining the amount to accrue for a delivered test, we consider factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and us, payment as a percentage of agreed upon reimbursement rate (if applicable), amount paid per test and any current development or changes that could impact reimbursement. Upon ultimate collection, the amount received is compared to previous estimates and the amount accrued is adjusted accordingly. Our ability to increase our revenue will depend on our ability to penetrate the market, obtain positive coverage policies from additional third-party payers, obtain reimbursement and/or enter into contracts with additional third-party payers for our current and new tests, and increase reimbursement rates for tests performed. Finally, should the judgments underlying our estimated reimbursement change, our accrued revenue and financial results could be negatively impacted in future periods.
Cost of 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. 24 -------------------------------------------------------------------------------- Table of Contents 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 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 2021 and in the six months endedJune 30, 2022 . Going forward, we are investing in the development of our pipeline products, including required clinical studies, the development of current tests for the nCounter instrument and the transition of manufacturing to our Veracyte SAS 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 150 representatives is organized by business unit, with separate teams calling on thyroid cancer, urologic cancers, pulmonology and colorectal cancers 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 theU.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 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 andHalioDx , 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, 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$21.1 million per year through 2024 and decrease thereafter. Interest Expense
Interest expense is attributable to our borrowings under debt agreements and costs associated with the prepayment of debt.
25 -------------------------------------------------------------------------------- Table of Contents Other (Loss) Income, Net Other income, net consists primarily of realized and unrealized gains and losses on foreign currency transactions, French research tax credits, interest expense on our debt and interest income from our cash held in interest bearing accounts. The French research tax credits (crédit d'impôt recherche or CIR) are generated by our wholly-owned subsidiary, Veracyte SAS, in connection with its research efforts performed inMarseille, France .
Foreign Currency Translation
The functional currency of our foreign subsidiary, Veracyte SAS, is the Euro. Assets and liabilities denominated in foreign currencies are translated toU.S. dollars using the exchange rates at the balance sheet date. Foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income (loss) within stockholders' equity. Revenue and expenses from our foreign subsidiaries are translated using the monthly average exchange rates in effect during the period in which the transactions occur. Foreign currency transaction gains and losses are recorded in other (loss) income, net, on the condensed consolidated statements of operations.
Results of Operations
Comparison of the three and six months ended
Three Months Ended June 30, Six Months Ended June 30, 2022 2021 Change % 2022 2021 Change % Revenue: Testing revenue$ 59,718 $ 50,793 $ 8,925 18%$ 115,698 $ 83,871 $ 31,827 38% Product revenue 3,108 2,688 420 16% 6,087 5,747 340 6% Biopharmaceutical and other revenue 10,038 1,624 8,414 518% 18,862 2,190 16,672 761% Total revenue 72,864 55,105 17,759 32% 140,647 91,808 48,839 53% Operating expense: Cost of testing revenue 18,584 15,589 2,995 19% 36,107 26,421 9,686 37% Cost of product revenue 1,646 1,323 323 24% 3,221 2,813 408 15% Cost of biopharmaceutical and other revenue 4,800 560 4,240 757% 9,415 641 8,774 1369% Research and development 9,377 6,249 3,128 50% 18,543 11,585 6,958 60% Selling and marketing 24,001 19,662 4,339 22% 47,755 35,958 11,797 33% General and administrative 19,798 15,473 4,325 28% 40,710 61,755 (21,045) (34)% Intangible asset amortization 5,391 3,723 1,668 45% 10,877 5,524 5,353 97% Total operating expenses 83,597 62,579 21,018 34% 166,628 144,697 21,931 15% Loss from operations (10,733) (7,474) (3,259) 44% (25,981) (52,889) 26,908 (51)% Other income (loss), net 1,086 (1,716) 2,802 (163)% 1,870 (1,964) 3,834 (195)% Loss before income taxes (9,647) (9,190) (457) 5% (24,111) (54,853) 30,742 (56)% Income tax benefit (115) (152) 37 (24)% (118) (3,947) 3,829 (97)% Net loss$ (9,532) $ (9,038) $ (494) 5%$ (23,993) $ (50,906) $ 26,913 (53)% Other Operating Data: Diagnostic tests reported 22,622 18,982 3,640 19% 43,661 31,285 12,376 40% Product tests sold 2,282 1,874 408 22% 4,488 4,008 480 12% Total test volume 24,904 20,856 4,048 19% 48,149 35,293 12,856 36% Depreciation and amortization expense$ 6,491 $ 4,500 $ 1,991 44%$ 13,048 $ 7,050 $ 5,998 85% Stock-based compensation expense$ 6,125 $ 4,064 $ 2,061 51%$ 12,980 $ 7,919 $ 5,061 64% 26
-------------------------------------------------------------------------------- Table of Contents Revenue Revenue increased$17.8 million for the three months endedJune 30, 2022 compared to the same period in 2021. This was primarily due to a$8.9 million increase in testing revenue driven by a 19% volume increase in our diagnostic tests, as well as an$8.4 million increase in our Biopharmaceutical and other revenue. Testing revenue and tests reported for the three months endedJune 30, 2022 increased primarily due to continued adoption of our Decipher and Afirma tests. Product revenue increased$0.4 million for the three months endedJune 30, 2022 compared to same period in 2021, as volume growth was partially offset by a decline in currency exchange rates. Biopharmaceutical and other revenue primarily increased for the three months endedJune 30, 2022 driven primarily by the contribution of theHalioDx acquisition. Revenue increased$48.8 million for the six months endedJune 30, 2022 compared to the same period in 2021. This was primarily due to a$31.8 million increase in testing revenue driven by a 40% volume increase in our diagnostic tests, as well as a$16.7 million increase in our Biopharmaceutical and other revenue. Testing revenue and tests reported for the six months endedJune 30, 2022 increased primarily due to the addition of the Decipher urology tests following our acquisition of Decipher Biosciences onMarch 12, 2021 , which contributed$30.7 million to the increase in testing revenue during the six months endedJune 30, 2022 . Product revenue increased$0.3 million for the six months endedJune 30, 2022 compared to same period in 2021, primarily driven by volume growth partially offset by a decline in currency exchange rates. Biopharmaceutical and other revenue primarily increased for the six months endedJune 30, 2022 driven primarily by the contribution of theHalioDx acquisition.
Cost of revenue
Comparison of the three and six months ended
Three Months Ended June 30, Six Months Ended June 30, 2022 2021 Change % 2022 2021 Change % Cost of testing revenue: Laboratory costs$ 9,568 $ 8,960 $ 608 7 %$ 18,297 $ 14,712 $ 3,585 24 % Sample collection costs 2,478 1,445 1,033 71 % 4,446 2,653 1,793 68 % Compensation expense 4,252 2,935 1,317 45 % 8,217 5,270 2,947 56 % License fees and royalties (406) 189 (595) (315) % (27) 253 (280) (111) % Depreciation and amortization 327 267 60 22 % 655 538 117 22 % Other expenses 860 622 238 38 % 1,801 1,060 741 70 % Allocations 1,505 1,171 334 29 % 2,718 1,935 783 40 % Total$ 18,584 $ 15,589 $ 2,995 19 %$ 36,107 $ 26,421 $ 9,686 37 % Cost of product revenue: Product costs$ 1,267 $ 1,062 $ 205 19 %$ 2,473 $ 2,257 $ 216 10 % License fees and royalties 275 242 33 14 % 549 518 31 6 % Depreciation and amortization 32 19 13 68 % 51 38 13 34 % Other expenses 53 - 53 NM 120 - 120 NM Allocations 19 - 19 NM 28 - 28 NM Total$ 1,646 $ 1,323 $ 323 24 %$ 3,221 $ 2,813 $ 408 15 % Cost of biopharmaceutical and other revenue: Compensation expense$ 2,541 $ 54 $ 2,487 4,606 %$ 4,878 $ 92 $ 4,786 5,202 % License fees and royalties 45 - 45 NM 71 - 71 NM Depreciation and amortization 83 - 83 NM 177 - 177 NM Other expenses 2,083 506 1,577 312 % 4,192 549 3,643 664 % Allocations 48 - 48 NM 97 - 97 NM Total$ 4,800 $ 560 $ 4,240 757 %$ 9,415 $ 641 $ 8,774 1,369 % Cost of testing revenue increased$3.0 million for the three months endedJune 30, 2022 compared to the same period in 2021. The increase for cost of testing is related to increased volume in testing, primarily related to Decipher. 27
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Table of Contents
Cost of testing revenue increased$9.7 million for the six months endedJune 30, 2022 compared to the same period in 2021. Following the acquisition of Decipher Biosciences inMarch 2021 , its operations are included in cost of testing revenue and contributed approximately$5.0 million to the increase for the six months endedJune 30, 2022 . The remaining increase for cost of testing is related to increased volume in testing, primarily related to Afirma. Cost of product revenue is related to sales of Prosigna. Cost of product revenue increased$0.3 million , or 24%, for the three months endedJune 30, 2022 compared to the same period in 2021, primarily due to a 22% increase in product tests sold.
Cost of product revenue increased
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 includes the operations ofHalioDx following its acquisition onAugust 2, 2021 , which contributed approximately$4.4 million of cost of revenue for the three months endedJune 30, 2022 and$8.8 million for the six months endedJune 30, 2022 . Research and development
Comparison of the three and six months ended
Three Months Ended June 30, Six Months Ended June 30, 2022 2021 Change % 2022 2021 Change % Research and development expense: Compensation expense$ 6,569 $ 4,554 $ 2,015 44%$ 13,694 $ 8,442 $ 5,252 62 % Direct research and development expense 1,226 828 398 48% 2,048 1,459 589 40 % Professional fees 429 187 242 129% 668 503 165 33 % Depreciation and amortization 121 67 54 81% 235 120 115 96 % Other expenses 346 67 279 416% 634 99 535 540 % Allocations 686 546 140 26% 1,264 962 302 31 % Total$ 9,377 $ 6,249 $ 3,128 50%$ 18,543 $ 11,585 $ 6,958 60 % Research and development expense increased$3.1 million , or 50%, for the three months endedJune 30, 2022 compared to the same period in 2021. The operations ofHalioDx are included in research and development expense and contributed approximately$2.2 million to the increase for the three months endedJune 30, 2022 . The remaining increase is primarily due to expense related to headcount and annual compensation increases. Research and development expense increased$7.0 million , or 60%, for the six months endedJune 30, 2022 compared to the same period in 2021. The increase in compensation expense was primarily due to an increase in headcount, including$5.4 million related to the acquisitions of Decipher Biosciences andHalioDx . 28 -------------------------------------------------------------------------------- Table of Contents Selling and marketing
Comparison of the three and six months ended
Three Months Ended June 30, Six Months Ended June 30, 2022 2021 Change % 2022 2021 Change % Selling and marketing expense: Compensation expense$ 17,261 $ 13,459 $ 3,802 28 %$ 35,589 $ 25,615 $ 9,974 39 % Direct marketing expense 1,720 2,689 (969) (36) % 3,021 4,054 (1,033) (25) % Professional fees 537 671 (134) (20) % 992 1,383 (391) (28) % Other expenses 3,107 1,802 1,305 72 % 5,467 2,938 2,529 86 % Allocations 1,376 1,041 335 32 % 2,686 1,968 718 36 % Total$ 24,001 $ 19,662 $ 4,339 22 %$ 47,755 $ 35,958 $ 11,797 33 % Selling and marketing expense increased$4.3 million , or 22%, for the three months endedJune 30, 2022 compared to the same period in 2021. The increase in compensation expense was primarily due to the addition ofHalioDx employees inAugust 2021 . The increase in other expenses were primarily due to increased travel and entertainment expense given limited travel in the prior year. Selling and marketing expense increased$11.8 million , or 33%, for the six months endedJune 30, 2022 compared to the same period in 2021. The increase in compensation expense was primarily due to the addition of Decipher employees inMarch 2021 , as well asHalioDx employees inAugust 2021 . The increase in other expenses were primarily due to the addition of Decipher Biosciences along with increased travel and entertainment.
General and administrative
Comparison of the three and six months ended
Three Months Ended June 30, Six Months Ended June 30, 2022 2021 Change % 2022 2021 Change % General and administrative expense: Compensation expense$ 11,592 $ 8,383 $ 3,209 38 %$ 26,690 $ 40,736 $ (14,046) (34) % Professional fees 4,617 6,469 (1,852) (29) % 9,579 19,711 (10,132) (51) % Occupancy expenses 1,481 1,374 107 8 % 2,992 2,119 873 41 % Depreciation and amortization 535 424 111 26 % 1,051 830 221 27 % Other expenses 5,207 1,581 3,626 229 % 7,191 3,224 3,967 123 % Allocations (3,634) (2,758) (876) 32 % (6,793) (4,865) (1,928) 40 % Total$ 19,798 $ 15,473 $ 4,325 28 %$ 40,710 $ 61,755 $ (21,045) (34) % General and administrative expense increased by$4.3 million for the three months endedJune 30, 2022 , compared to the same period in 2021. During the three months endedJune 30, 2022 , we recorded expense of$3.3 million related to the impairment of an intangible asset. The remaining increase was driven primarily in compensation related to the acquisition ofHalioDx inAugust 2021 , headcount additions and annual compensation adjustments which was partially offset by the reduction in professional fees associated with acquisition related charges in the prior year. General and administrative expenses related to occupancy costs and information technology costs are allocated to general and administrative expense, selling and marketing expense, research and development expense, and cost of revenue based on the headcount and employee location. General and administrative expense decreased by$21.0 million for the six months endedJune 30, 2022 , compared to the same period in 2021. This decrease is driven by expenses recognized in the six months endedJune 30, 2021 related to the acquisition of Decipher Biosciences, including$25.1 million of stock-based compensation and$10.6 million of professional fees and other costs associated with the transaction. Following the acquisitions of Decipher Biosciences inMarch 2021 and 29 -------------------------------------------------------------------------------- Table of ContentsHalioDx inAugust 2021 , their operations contributed to an increase in general and administrative expenses of$6.9 million . Additionally, we recorded expense of$3.3 million in the six months endedJune 30, 2022 related to the impairment of an intangible asset. The remaining$4.4 million increase was primarily due to annual compensation adjustments and investments in infrastructure.
Other income (loss), net
Other income (loss), net, increased$2.8 million for the three months endedJune 30, 2022 compared to the same period in 2021, due to an increase of$0.9 million from operations inFrance related to the CIR during the period and an increase of$1.3 million of unrealized foreign currency loss. The Company recognizes other income from the CIR over time based on when the research and development expenses are incurred. Other income (loss), net, increased$3.8 million for the six months endedJune 30, 2022 compared to the same period in 2021, due to an increase of$1.8 million from operations inFrance related to the CIR during the period and an increase of$1.5 million of unrealized foreign currency loss.
Income tax benefit
We recorded income tax benefits of$0.1 million and$0.2 million for the three months endedJune 30, 2022 and 2021, respectively, and$0.1 million and$3.9 million for the six months endedJune 30, 2022 and 2021, respectively. 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.
Liquidity and Capital Resources
From inception throughJune 30, 2022 , we have been financed primarily through net proceeds from the sale of our equity securities. We have incurred net losses since our inception. For the six months endedJune 30, 2022 , we had a net loss of$24.0 million , and we expect to incur additional losses for the remainder of 2022 and potentially in future years. As ofJune 30, 2022 , we had an accumulated deficit of$381.2 million . We believe our existing cash and cash equivalents and short-term investments of$164.0 million as ofJune 30, 2022 , and our revenue during the next 12 months, will be sufficient to meet our anticipated cash requirements for at least the next 12 months from the filing date of this report. We expect that our near- and longer-term liquidity requirements will continue to consist of costs to run our laboratories, research and development expenses, selling and marketing expenses, general and administrative expenses, working capital, costs to service our Loan and Security Agreement (See Note 7 to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for more information about our Loan and Security Agreement), capital expenditures, lease obligations and general corporate expenses associated with the growth of our business. However, we may also use cash to acquire or invest in complementary businesses, technologies, services or products that would change our cash requirements. If we are not able to generate revenue to finance our cash requirements, we will need to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic collaborations or licensing arrangements. If we raise funds by issuing equity securities, dilution to stockholders could result. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings could impose significant restrictions on our operations. The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights, restrictions on our cash pursuant to the terms of our Loan and Security Agreement and other operating restrictions that could adversely affect our ability to conduct our business. Our Loan and Security Agreement imposes restrictions on our operations, increases our fixed payment obligations and has restrictive covenants. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms. These agreements may require that we relinquish or license to a third-party on unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize ourselves, or reserve certain opportunities for future potential arrangements when we might be able to achieve more favorable terms. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives, or forgo potential acquisitions or investments. In addition, we may have to work with a partner on one or more of our products or development programs, which could lower the economic value of those programs to us. 30 -------------------------------------------------------------------------------- Table of Contents Operating Leases We lease office and laboratory facilities inSouth San Francisco andSan Diego, California ;Austin, Texas ;Marseille, France ; andRichmond, Virginia , and lease certain equipment under various non-cancelable lease agreements. The lease terms extend toOctober 2030 and contain extension of lease term and expansion options. As ofJune 30, 2022 , the leases have a weighted average remaining lease term of 4.3 years and total future minimum lease payments of$18.9 million . Veracyte SAS has signed a lease agreement for facilities which will be constructed inMarseille, France . The lease will commence upon completion of the construction of the office building which we currently expect to occur in the fourth quarter of 2023 at which time we will record a lease liability and a corresponding ROU asset. The initial term of the lease will be twelve years with annual rent of approximately$1.4 million , which is subject to change based on final construction. Loan and Security Agreement OnNovember 3, 2017 , we entered into the Loan and Security Agreement withSilicon Valley Bank . The Loan and Security Agreement allows us to borrow up to$35.0 million , with a$25.0 million term loan, or Term Loan, and a revolving line of credit of up to$10.0 million , or the Revolving Line of Credit, subject to, with respect to the Revolving Line of Credit, a borrowing base of 85% of eligible accounts receivable. The Term Loan was advanced upon the closing of the Loan and Security Agreement. Borrowings under the Loan and Security Agreement mature inOctober 2022 . The Term Loan bears interest at a variable rate equal to (i) the thirty-dayU.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. We are also required to pay an annual facility fee on the Revolving Line of Credit of$25,000 . We may prepay the outstanding principal amount under the Term Loan plus accrued and unpaid interest and, if the Term Loan is repaid in full, a prepayment premium of$250,000 . If the Loan and Security Agreement is terminated before maturity, then a termination fee equal to 1% of the Revolving Line of Credit, or$0.1 million , will be due. In addition, a final payment on the Term Loan in the amount of$1.2 million is due upon the earlier of the maturity date of the Term Loan or its payment in full. In 2019 and 2020, we prepaid$24.9 million and$0.1 million , respectively, of the principal amount of the Term Loan Advance, and did not incur any prepayment premium as we did not repay the Term Loan Advance in full.
The Loan and Security Agreement matures on
The Loan and Security Agreement contains customary representations, warranties,
and events of default, as well as affirmative and negative covenants. As of
Our obligations under the Loan and Security Agreement are secured by substantially all of our assets (excluding intellectual property), subject to certain customary exceptions.
Cash Flows
The following table summarizes our cash flows for the six months ended
Six Months EndedJune 30, 2022
2021
Net cash used in operating activities$ (9,235) $
(38,674)
Net cash used in investing activities (11,760)
(574,134)
Net cash provided by financing activities 1,915
592,932
Cash Flows from Operating Activities
Cash used in operating activities for the six months endedJune 30, 2022 was$9.2 million . The net loss of$24.0 million includes non-cash charges of$12.6 million of stock-based compensation expense,$13.0 million of depreciation and amortization, which includes$10.9 million of intangible asset amortization, and non-cash lease expense of$1.6 million . Cash used as a result of changes in operating assets and liabilities was$16.5 million , primarily comprising a decrease in accrued 31 -------------------------------------------------------------------------------- Table of Contents liabilities and deferred revenue of$5.3 million , an increase in supplies and inventory of$3.7 million , an increase in accounts receivable of$2.9 million , an increase in prepaid expense and other current assets of$1.8 million and a$2.1 million impact from other working capital accounts. Cash used in operating activities for the six months endedJune 30, 2021 was$38.7 million . The net loss of$50.9 million includes non-cash charges of$7.9 million of stock-based compensation expense,$7.1 million of depreciation and amortization, which includes$5.5 million of intangible asset amortization, noncash lease expense of$0.9 million , a$0.2 million expense for the revaluation of the contingent consideration related to the NanoString transaction and$3.9 million of deferred income taxes. Cash used as a result of changes in operating assets and liabilities was$1.9 million primarily comprising an increase in accounts receivable of$6.7 million , an increase in prepaid expense and other current assets of$1.3 million and a decrease in operating lease liability of$1.0 million partially offset by an increase in accounts payable of$2.8 million and an increase in accrued liabilities and deferred revenue of$4.8 million .
Cash Flows from Investing Activities
Cash used in investing activities, for the six months endedJune 30, 2022 , was$11.8 million for the acquisition of short-term investments and property and equipment.
Cash used in investing activities for the six months ended
Cash Flows from Financing Activities
Cash provided by financing activities, for the six months endedJune 30, 2022 , was$1.9 million , consisting of$3.9 million in proceeds from the exercise of options to purchase our common stock and the purchase of stock under our Employee Stock Purchase Plan, or ESPP, partially offset by$1.9 million in tax payments during the period related to the vesting of restricted stock units granted to employees. Cash provided by financing activities for the six months endedJune 30, 2021 was$592.9 million , consisting of$593.8 million in net proceeds from the issuance of common stock in a public offering inFebruary 2021 ,$6.6 million in proceeds from the exercise of options to purchase our common stock and purchase of stock under ESPP partially offset by$7.5 million in tax payments during the period related to the vesting of restricted stock units granted to employees.
Recent Accounting Pronouncements
InOctober 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 afterDecember 15, 2022 , with early adoption permitted. We do not expect to have a material impact on our consolidated financial statements and related disclosures from the adoption of this guidance.
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