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, the Veracyte logo, HalioDx, Decipher, Decipher GRID, Afirma, Percepta,
Envisia, Prosigna, LymphMark, Immunoscore, TMExplore, Brightplex, Immunosign,
"Know by Design" and "More about You" 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.

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 the United States through our central laboratories, our exclusive license for diagnostic rights to the nCounter Analysis System positions us to deliver our tests to patients worldwide through laboratories and hospitals that can perform the tests locally.



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. In the
United States, we offer laboratory developed tests, or LDTs, which we perform in
our centralized, CLIA-certified laboratories in South San Francisco and San
Diego, California, and Richmond, Virginia, supported by our cytopathology
expertise in our Austin, Texas CLIA lab. In addition, outside of the 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.

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In March 2021, Veracyte acquired Decipher Biosciences, expanding our genomic
testing menu into urologic cancers. The acquisition also provided Veracyte 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.

In August 2021, we acquired HalioDx, 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 across the 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;
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•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 in March 2021 and HalioDx in August 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.

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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.

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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

Through June 30, 2022, we had derived most of our revenue from the sale of the
Decipher urologic tests and Afirma, delivered primarily to physicians in the
United States. We generally invoice third-party payers upon delivery of a
patient report to the prescribing physician. As such, we take the assignment of
benefits and the risk of cash collection from the third-party payer and
individual patients. Third-party payers and other customers in excess of 10% of
total revenue and their related revenue as a percentage of total revenue were as
follows:


                           Three Months Ended 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.

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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 ended June 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 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 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, 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.


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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 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 (loss) income, net,
on the condensed consolidated statements of operations.

Results of Operations

Comparison of the three and six months ended June 30, 2022 and 2021 (in thousands of dollars, except percentages and test volume):




                                                             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%



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Revenue

Revenue increased $17.8 million for the three months ended June 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 ended June 30,
2022 increased primarily due to continued adoption of our Decipher and Afirma
tests. Product revenue increased $0.4 million for the three months ended June
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 ended June 30, 2022 driven primarily by
the contribution of the HalioDx acquisition.

Revenue increased $48.8 million for the six months ended June 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 ended June 30, 2022
increased primarily due to the addition of the Decipher urology tests following
our acquisition of Decipher Biosciences on March 12, 2021, which contributed
$30.7 million to the increase in testing revenue during the six months ended
June 30, 2022. Product revenue increased $0.3 million for the six months ended
June 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 ended June 30, 2022 driven
primarily by the contribution of the HalioDx acquisition.

Cost of revenue

Comparison of the three and six months ended June 30, 2022 and 2021 is as follows (in thousands of dollars, except percentages):




                                                             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 ended June
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.
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Cost of testing revenue increased $9.7 million for the six months ended June 30,
2022 compared to the same period in 2021. Following the acquisition of Decipher
Biosciences in March 2021, its operations are included in cost of testing
revenue and contributed approximately $5.0 million to the increase for the six
months ended June 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 ended June 30, 2022
compared to the same period in 2021, primarily due to a 22% increase in product
tests sold.

Cost of product revenue increased $0.4 million, or 15%, for the six months ended June 30, 2022 compared to the same period in 2021, primarily due to a 12% increase in product tests sold.



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 of HalioDx following its acquisition on August 2, 2021,
which contributed approximately $4.4 million of cost of revenue for the three
months ended June 30, 2022 and $8.8 million for the six months ended June 30,
2022.

Research and development

Comparison of the three and six months ended June 30, 2022 and 2021 is as follows (in thousands of dollars, except percentages):




                                                         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 ended June 30, 2022 compared to the same period in 2021. The operations
of HalioDx are included in research and development expense and contributed
approximately $2.2 million to the increase for the three months ended June 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 ended June 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 and HalioDx.

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Selling and marketing

Comparison of the three and six months ended June 30, 2022 and 2021 is as follows (in thousands of dollars, except percentages):




                                                      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 ended June 30, 2022 compared to the same period in 2021. The increase in
compensation expense was primarily due to the addition of HalioDx employees in
August 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 ended June 30, 2022 compared to the same period in 2021. The increase in
compensation expense was primarily due to the addition of Decipher employees in
March 2021, as well as HalioDx employees in August 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 June 30, 2022 and 2021 is as follows (in thousands of dollars, except percentages):




                                                        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 ended June 30, 2022, compared to the same period in 2021. During the
three months ended June 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 of HalioDx in August 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
ended June 30, 2022, compared to the same period in 2021. This decrease is
driven by expenses recognized in the six months ended June 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 in
March 2021 and
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HalioDx in August 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 ended June 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 ended June
30, 2022 compared to the same period in 2021, due to an increase of $0.9 million
from operations in France 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 ended June
30, 2022 compared to the same period in 2021, due to an increase of $1.8 million
from operations in France 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 ended June 30, 2022 and 2021, respectively, and $0.1 million and
$3.9 million for the six months ended June 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 through June 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 ended June 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 of June 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 of June 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.

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Operating Leases

We lease office and laboratory facilities in South San Francisco and San Diego,
California; Austin, Texas; Marseille, France; and Richmond, Virginia, and lease
certain equipment under various non-cancelable lease agreements. The lease terms
extend to October 2030 and contain extension of lease term and expansion
options. As of June 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 in Marseille, 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

On November 3, 2017, we entered into the Loan and Security Agreement with
Silicon 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 in October 2022. The Term Loan bears interest at a variable rate equal to
(i) the thirty-day U.S. London Interbank Offer Rate, or LIBOR, plus (ii) 4.20%,
with a minimum rate of 5.43% per annum. Principal amounts outstanding under the
Revolving Line of Credit bear interest at a variable rate equal to (i) LIBOR
plus (ii) 3.50%, with a minimum rate of 4.70% per annum. 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 October 1, 2022. As of June 30, 2022, the principal balance outstanding was one dollar.

The Loan and Security Agreement contains customary representations, warranties, and events of default, as well as affirmative and negative covenants. As of June 30, 2022, we were in compliance with all such covenants.

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 June 30, 2022 and 2021 (in thousands of dollars):




                                                  Six Months Ended June 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 ended June 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
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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 ended June 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 ended June 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 June 30, 2021 was $574.1 million consisting of $574.4 million for the acquisition of Decipher Biosciences and $2.7 million for the acquisition of property and equipment, partially offset by $3.0 million of proceeds from the sale of an equity investment.

Cash Flows from Financing Activities



Cash provided by financing activities, for the six months ended June 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 ended June 30, 2021 was
$592.9 million, consisting of $593.8 million in net proceeds from the issuance
of common stock in a public offering in February 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



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. 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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