(unaudited)

(In thousands, ~~of dollars,~~ except share and per share amounts)

	*September 30, 2020*			*December 31, 2019*
				*(See Note 1)*
Assets
Current assets:
Cash and cash equivalents	$	345,080		$	159,317
Accounts receivable		17,629			19,329
Supplies		4,456			6,806
Prepaid expenses and other current assets		3,150			2,235
Total current assets		370,315			187,687
Property and equipment, net		8,914			8,933
Right-of-use assets - operating lease		8,094			8,808
Finite-lived intangible assets, net		61,197			65,019
Goodwill		2,725			2,725
Restricted cash		603			603
Other assets		2,303			1,437
Total assets	$	454,151		$	275,212
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,932		$	2,328
Accrued liabilities		10,445			13,734
Current portion of operating lease liability		1,542			1,407
Total current liabilities		13,919			17,469
Long-term debt		756			694
Acquisition-related contingent consideration		6,420			6,088
Operating lease liability, net of current portion		10,331			11,506
Total liabilities		31,426			35,757
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding as of September 30, 2020 and December 31, 2019		0			0
Common stock, $0.001 par value; 125,000,000 shares authorized, 57,813,833 and 49,625,341 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively		58			50
Additional paid-in capital		696,217			486,090
Accumulated deficit		(273,550	)		(246,685	)
Total stockholders’ equity		422,725			239,455
Total liabilities and stockholders’ equity	$	454,151		$	275,212

September 30,
2017 December 31, 2016
(Unaudited) (See Note 1)
Assets

Current assets:

Cash and cash equivalents $ 41,195
$ 59,219
Accounts receivable 11,635
8,756
Supplies inventory 3,760
3,475
Prepaid expenses and other current assets 1,617
2,057
Restricted cash —
120
Total current assets 58,207
73,627
Property and equipment, net 10,281
11,480
Finite-lived intangible assets, net 13,333
14,133
Goodwill 1,057
1,057
Restricted cash 603
603
Other assets 178
134
Total assets $ 83,659
$ 101,034
Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable $ 3,161
$ 2,424
Accrued liabilities 8,058
9,110
Total current liabilities 11,219
11,534
Long-term debt 24,997
24,918
Capital lease liability, net of current portion 382
599
Deferred rent, net of current portion 4,245
4,402
Total liabilities 40,843
41,453
Commitments and contingencies

Stockholders’ equity:

Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding as of September 30, 2017 and December 31, 2016 —
—
Common stock, $0.001 par value; 125,000,000 shares authorized, 33,977,840 and 33,762,278 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively 34
34
Additional paid-in capital 245,430
239,631
Accumulated deficit (202,648 ) (180,084 )
Total stockholders’ equity 42,816
59,581
Total liabilities and stockholders’ equity $ 83,659
$ 101,034

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

Table of Contents

~~VERACYTE, INC.~~

VERACYTE, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(In thousands, ~~of dollars,~~ except share and per share amounts)

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2020*			*2019*			*2020*			*2019*
Revenue:
Testing revenue	$	28,270		$	26,723		$	70,473		$	78,798
Product revenue		2,027			0			7,149			0
Biopharmaceutical revenue		824			2,250			5,325			7,840
Collaboration revenue		0			2,000			0			4,000
Total Revenue		31,121			30,973			82,947			90,638
Operating expenses:
Cost of testing revenue		9,118			9,114			26,157			26,404
Cost of product revenue		1,048			0			3,539			0
Cost of biopharmaceutical revenue		204			0			572			0
Research and development		4,042			3,643			12,618			10,408
Selling and marketing		10,955			13,088			39,240			39,508
General and administrative		8,546			6,624			24,316			20,448
Intangible asset amortization		1,274			267			3,822			800
Total operating expenses		35,187			32,736			110,264			97,568
Loss from operations		(4,066	)		(1,763	)		(27,317	)		(6,930	)
Interest expense		(55	)		(58	)		(175	)		(596	)
Other income (loss), net		(3	)		1,091			627			2,385
Net loss and comprehensive loss	$	(4,124	)	$	(730	)	$	(26,865	)	$	(5,141	)
Net loss per common share, basic and diluted	$	(0.08	)	$	(0.02	)	$	(0.52	)	$	(0.11	)
Shares used to compute net loss per common share, basic and diluted		54,858,052			48,588,296			51,632,750			45,141,502

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Revenue $ 17,519
$ 18,603
$ 52,357
$ 46,828
Operating expenses:

Cost of revenue 7,169
6,367
20,426
18,947
Research and development 3,046
4,006
10,679
11,734
Selling and marketing 7,885
7,087
23,215
22,416
General and administrative 5,520
5,763
17,731
18,062
Intangible asset amortization 267
266
800
800
Total operating expenses 23,887
23,489
72,851
71,959
Loss from operations (6,368 ) (4,886 ) (20,494 ) (25,131 )
Interest expense (815 ) (799 ) (2,423 ) (1,951 )
Other income, net 134
48
353
127
Net loss and comprehensive loss $ (7,049 ) $ (5,637 ) $ (22,564 ) $ (26,955 )
Net loss per common share, basic and diluted $ (0.21 ) $ (0.20 ) $ (0.67 ) $ (0.97 )
Shares used to compute net loss per common share, basic and diluted 33,946,748
27,916,819
33,881,705
27,865,100

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

Table of Contents

~~VERACYTE, INC.~~

VERACYTE, INC.

Condensed Consolidated Statements of ~~Cash Flows~~

Stockholders' Equity

(Unaudited)

(In ~~thousands of dollars)~~thousands)

					*Additional*						*Total*
	*Common Stock*				*Paid-in*			*Accumulated*			*Stockholders'*
	*Shares*		*Amount*		*Capital*			*Deficit*			*Equity*
Balance at June 30, 2020		50,446	$	50	$	495,523		$	(269,426	)	$	226,147
Sale of common stock in a public offering, net of offering costs of $13,169		6,900		7		193,824			0			193,831
Issuance of common stock upon exercise of stock options and vesting of restricted stock units		427		1		3,328			0			3,329
Issuance of common stock under employee stock purchase plan (ESPP)		41		0		935			0			935
Tax portion of vested restricted stock units		—		0		(483	)		0			(483	)
Stock-based compensation expense (employee)		—		0		3,032			0			3,032
Stock-based compensation expense (non-employee)		—		0		15			0			15
Stock-based compensation expense (ESPP)		—		0		43			0			43
Net loss and comprehensive loss		—		0		0			(4,124	)		(4,124	)
Balance at September 30, 2020		57,814	$	58	$	696,217		$	(273,550	)	$	422,725

Balance at December 31, 2019		49,625	$	50	$	486,090		$	(246,685	)	$	239,455
Sale of common stock in a public offering, net of offering costs of $13,169		6,900		7		193,824			0			193,831
Issuance of common stock upon exercise of stock options and vesting of restricted stock units		1,187		1		8,073			0			8,074
Issuance of common stock under ESPP		102		0		2,037			0			2,037
Tax portion of vested restricted stock units		—		0		(3,161	)		0			(3,161	)
Stock-based compensation expense (employee)		—		0		8,591			0			8,591
Stock-based compensation expense (non-employee)		—		0		35			0			35
Stock-based compensation expense (ESPP)		—		0		728			0			728
Net loss and comprehensive loss		—		0		0			(26,865	)		(26,865	)
Balance at September 30, 2020		57,814	$	58	$	696,217		$	(273,550	)	$	422,725

					*Additional*						*Total*
	*Common Stock*				*Paid-in*			*Accumulated*			*Stockholders'*
	*Shares*		*Amount*		*Capital*			*Deficit*			*Equity*
Balance at June 30, 2019		48,255	$	48	$	462,689		$	(238,497	)	$	224,240
Issuance of common stock upon exercise of stock options and vesting of restricted stock units		511		1		4,231			0			4,232
Issuance of common stock under ESPP		56		0		774			0			774
Tax portion of vested restricted stock units		—		0		(132	)		0			(132	)
Stock-based compensation expense (employee)		—		0		2,324			0			2,324
Stock-based compensation expense (non-employee)		—		0		62			0			62
Stock-based compensation expense (ESPP)		—		0		254			0			254
Net loss and comprehensive loss		—		0		0			(730	)		(730	)
Balance at September 30, 2019		48,822	$	49	$	470,202		$	(239,227	)	$	231,024

Balance at December 31, 2018		40,863	$	41	$	313,800		$	(234,086	)	$	79,755
Sale of common stock in a public offering, net of offering costs of $9,208		6,325		6		137,842			0			137,848
Issuance of common stock upon exercise of stock options and vesting of restricted stock units		1,498		2		11,139			0			11,141
Issuance of common stock under ESPP		136		0		1,266			0			1,266
Tax portion of vested restricted stock units		—		0		(810	)		0			(810	)
Stock-based compensation expense (employee)		—		0		6,255			0			6,255
Stock-based compensation expense (non-employee)		—		0		138			0			138
Stock-based compensation expense (ESPP)		—		0		572			0			572
Net loss and comprehensive loss		—		0		0			(5,141	)		(5,141	)
Balance at September 30, 2019		48,822	$	49	$	470,202		$	(239,227	)	$	231,024

Nine Months Ended September 30,
2017 2016
Operating activities

Net loss $ (22,564 ) $ (26,955 )
Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization 2,839
2,602
Bad debt expense —
68
Loss on disposal of property and equipment —
12
Genzyme co-promotion fee amortization —
(948 )
Stock-based compensation 4,825
4,745
Conversion of accrued interest on long-term debt —
385
Amortization and write-off of debt discount and issuance costs 79
146
Interest on debt balloon payment and prepayment penalty —
206
Changes in operating assets and liabilities:

Accounts receivable (2,879 ) (2,877 )
Supplies inventory (285 ) 351
Prepaid expenses and current other assets 240
37
Other assets (44 ) (44 )
Accounts payable 891
(387 )
Accrued liabilities and deferred rent (1,201 ) (1,091 )
Net cash used in operating activities (18,099 ) (23,750 )
Investing activities

Purchases of property and equipment (1,455 ) (3,760 )
Proceeds from sale of property and equipment 440
—
Change in restricted cash 120
(2 )
Net cash used in investing activities (895 ) (3,762 )
Financing activities

Proceeds from the issuance of long-term debt, net of debt issuance costs —
24,452
Payment of long-term debt —
(5,000 )
Payment of end-of-term debt obligation and prepayment penalty —
(288 )
Proceeds from the issuance of common stock in a public offering, net of costs 200
—
Payment of capital lease liability (204 ) —
Proceeds from the exercise of common stock options and employee stock purchases 974
963
Net cash provided by financing activities 970
20,127
Net decrease in cash and cash equivalents (18,024 ) (7,385 )
Cash and cash equivalents at beginning of period 59,219
39,084
Cash and cash equivalents at end of period $ 41,195
$ 31,699
Supplementary cash flow information of non-cash investing and financing activities:

Purchases of property and equipment included in accounts payable and accrued liabilities $ 188
$ —

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

Table of Contents

~~VERACYTE, INC.~~

VERACYTE, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	*Nine Months Ended September 30,*
	*2020*			*2019*
Operating activities
Net loss	$	(26,865	)	$	(5,141	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		5,919			2,836
Gain on disposal of property and equipment		0			(23	)
Stock-based compensation		9,354			6,965
Amortization of debt issuance costs		0			83
Interest on end-of-term debt obligation		162			174
Write-down of excess supplies		1,088			0
Noncash lease expense		714			810
Revaluation of acquisition-related contingent consideration		332			0
Effect of foreign currency on operations		(17	)		0
Changes in operating assets and liabilities:
Accounts receivable		1,742			(10,445	)
Supplies		1,262			(3,206	)
Prepaid expenses and other current assets		(923	)		185
Other assets		134			(142	)
Operating lease liability		(1,040	)		(881	)
Accounts payable		(534	)		2,505
Accrued liabilities		(3,300	)		1,258
Net cash used in operating activities		(11,972	)		(5,022	)
Investing activities
Purchases of property and equipment		(1,949	)		(1,656	)
Purchase of equity securities		(1,000	)		0
Proceeds from disposal of property and equipment		0			23
Net cash used in investing activities		(2,949	)		(1,633	)
Financing activities
Proceeds from the issuance of common stock in a public offering, net		193,831			137,848
Payment of long-term debt		(100	)		(24,900	)
Payment of finance lease liability		0			(229	)
Payment of taxes on vested restricted stock units		(3,161	)		(810	)
Proceeds from the exercise of common stock options and employee stock purchases		10,114			12,413
Net cash provided by financing activities		200,684			124,322
Net increase in cash, cash equivalents and restricted cash		185,763			117,667
Cash, cash equivalents and restricted cash at beginning of period		159,920			78,598
Cash, cash equivalents and restricted cash at end of period	$	345,683		$	196,265
Supplementary cash flow information:
Purchases of property and equipment included in accounts payable and accrued liability	$	355		$	821
Interest paid on debt	$	3		$	330

Table of Contents

Cash, Cash Equivalents and Restricted Cash:

	*September 30, 2020*		*December 31, 2019*
Cash and cash equivalents	$	345,080	$	159,317
Restricted cash		603		603
Total cash, cash equivalents and restricted cash	$	345,683	$	159,920

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

Table of Contents

VERACYTE, INC.

Notes to Financial Statements

(unaudited)

1. Organization, ~~and~~ Description of Business

and Summary of Significant Accounting Policies

Veracyte, Inc. ~~(“Veracyte”~~, or Veracyte, or the ~~“Company”)~~Company, is a global genomic diagnostics company that improves patient care by providing answers to clinical questions to inform diagnosis and treatment decisions throughout the patient journey in cancer and other diseases. The Company’s growing menu of genomic tests leverage advances in genomic science and technology to change care for patients, enabling them to avoid risky, costly procedures and quicken time to appropriate treatment. With Veracyte’s exclusive global access to a best-in-class diagnostics instrument platform, the Company is positioned to deliver its tests to patients worldwide through laboratories and hospitals that can perform the tests locally.

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

~~Veracyte is a leading genomic diagnostics company that is fundamentally improving patient care by resolving diagnostic uncertainty with evidence that is trustworthy and actionable.~~

The Company's products uniquely combine genomic technology, clinical science and machine learning to provide answers that give physicians and patients a clear path forward without risky, costly surgery that is often unnecessary.

~~Since the Company's founding in 2008, it has commercialized three~~Company offers genomic tests ~~that it believes are transforming diagnostics:~~

~~Afirma~~ in four disease areas: thyroid cancer; lung cancer; idiopathic pulmonary fibrosis, or IPF, and breast cancer.

Thyroid ~~FNA Analysis~~Cancer - ~~The Afirma genomic classifiers, specifically the Afirma Gene Expression Classifier, or GEC, and the recently commercialized~~ Afirma Genomic Sequencing Classifier ~~or GSC, employ proprietary gene signatures to determine whether thyroid nodules previously classified by cytopathology as indeterminate can be reclassified as benign, thus enabling~~and Xpression Atlas. The Company's Afirma offerings comprise the ~~patient to avoid an unnecessary surgery. The new~~ Afirma GSC ~~uniquely combines~~and Xpression Atlas, which help guide next steps for patients with potentially cancerous thyroid nodules. The offerings are intended to provide physicians with clinically actionable results from a single fine needle aspiration, or FNA biopsy. The Afirma GSC was developed with RNA whole-transcriptome sequencing and machine learning, and is used to ~~leverage more enriched, previously undetectable genomic information. It can~~ identify ~~30 percent more~~patients with benign thyroid nodules among those ~~deemed~~with indeterminate ~~following cytopathology.~~cytopathology results in order to rule out unnecessary thyroid surgery.

The Afirma Xpression Atlas complements the Afirma GSC ~~also provides classifiers that can further guide surgery if cancer is found, including classifiers~~by providing genomic alteration content from the same FNA samples used in Afirma GSC testing to help physicians decide with greater confidence on the surgical or therapeutic pathway for ~~medullary thyroid cancer,~~their patients. The Company commercially launched the ~~BRAF V600E variant,~~Afirma Xpression Atlas in 2018 and ~~classifiers to identify RET/PTC1 and RET/PTC3 fusions,~~in April 2020 introduced an expanded version of the test, which ~~are typically associated with cancer.~~

includes significantly more genomic content.

Lung Cancer - Percepta ~~Bronchial~~ Genomic ~~Classifier -~~ Sequencing Classifier.The ~~23-gene~~ Percepta classifier improves lung cancer ~~screening~~diagnosis when diagnostic bronchoscopy results are inconclusive. This second-generation test was developed using the Company's RNA whole-transcriptome sequencing and ~~diagnosis by identifying~~machine learning platform and was commercially introduced in June 2019. The Percepta classifier identifies patients with lung nodules who are at low risk of cancer ~~among those whose lung nodules are not clearly benign or malignant following traditional evaluation.~~and may avoid further, invasive procedures as well as patients at high risk of cancer so they may obtain faster diagnosis and treatment. The ~~Percepta classifier analyzes~~test is built upon foundational "field of injury" science - through which genomic changes ~~that occur~~associated with lung cancer in ~~the epithelial cells lining the airways, which we call the field of injury, of~~ current orand former smokers ~~to assess~~can be identified with a ~~patient’s risk~~simple brushing of ~~having lung cancer,~~a person's airway - without the need to ~~test~~sample the ~~often-hard-to-reach~~often hard-to-reach nodule directly.

IPF - Envisia Genomic ~~Classifier~~ ~~- Commercialized in October 2016, the~~Classifier. The Envisia classifier ~~is designed to improve physicians’ ability to differentiate~~improves diagnosis of idiopathic pulmonary fibrosis orby helping physicians better differentiate IPF from other interstitial lung diseases, or ~~ILD,~~ILDs, without the need for ~~invasive and potentially risky~~ surgery. The ~~Envisia classifier uses machine learning coupled with powerful, deep RNA sequencing to detect~~test identifies the ~~presence or absence~~genomic pattern of usual interstitial pneumonia, or UIP, a ~~classic diagnostic pattern whose presence~~hallmark of IPF, with high accuracy on patient samples that are obtained through transbronchial biopsy, a nonsurgical procedure that is ~~essential~~commonly used in lung evaluation.

Breast Cancer - Prosigna Breast Cancer Prognostic Gene Signature Assay. The Prosigna test, acquired in December 2019 through the Company's strategic transaction with NanoString Technologies, Inc., or NanoString, uses advanced genomic technology to inform next steps for patients with early-stage breast cancer, based on the ~~diagnosis~~genomic make-up of ~~IPF.~~

~~All~~their disease. The test uses a set of 50 genes known as the PAM50 gene signature and can provide a breast cancer patient and physician with a prognostic score that indicates the probability of cancer recurrence over ten years. Physicians use Prosigna to help guide therapeutic decisions so that patients receive a therapeutic intervention, such as chemotherapy, only if clinically warranted. Patient test results outside of the ~~Company's testing services are made available through~~United States include intrinsic breast cancer subtypes to complement the risk-of-recurrence score.

The Company performs its ~~clinical reference laboratories located~~genomic tests for thyroid cancer, lung cancer and IPF in its CLIA-certified laboratory in South San Francisco, ~~California~~California. In December 2019, the Company announced the acquisition from NanoString Technologies of the exclusive global diagnostics license to the nCounter Analysis System, or the nCounter system, and ~~Austin, Texas,~~the Prosigna breast cancer prognostic gene signature assay, which is commercially available, and the LymphMark lymphoma subtyping assay, which is in development. Both tests are ~~each certified under~~designed for use on the ~~Clinical Laboratory Improvement Amendments~~nCounter system. The Prosigna test kits and associated products are sold to laboratories and hospitals in global markets.

Table of ~~1988,~~Contents

VERACYTE, INC.

Notes to Financial Statements

(unaudited)

The Company’s approach also provides multiple opportunities for partnerships with biopharmaceutical and diagnostic testing companies. In developing its products, the Company has built or ~~CLIA.~~

gained access to unique biorepositories, proprietary technology and bioinformatics that it believes are important to the development of new targeted therapies, determining clinical trial eligibility and guiding treatment selection. Additionally, the Company believes that the nCounter system, with its ability to simultaneously analyze RNA, DNA or protein targets in up to 800 genes; its ease of use, and its need for minimal hands-on time, provides an attractive distributed platform for other diagnostic companies seeking to make their genomic tests available to international markets.

Basis of Presentation

The Company’s condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, ~~(“GAAP”).~~or GAAP. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The condensed consolidated balance sheet as of September 30, ~~2017,~~2020, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, ~~2017~~ 2020 and ~~2016,~~2019, the condensed consolidated statements of stockholders' equity for the three and nine months ended September 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the nine months ended September 30, ~~2017~~ 2020 and ~~2016~~2019 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of its financial position, operating results, stockholders' equity and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, ~~2016~~2019 has been derived from audited financial statements. The results for the three and nine months ended September 30, ~~2017~~2020 are not necessarily indicative of the results expected for the full year or any other period.

The accompanying interim period condensed consolidated financial statements and related financial information included in this Quarterly Report on Form ~~10-Q~~10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form ~~10-K~~10-K for the year ended December 31, ~~2016.~~

2019.

Reclassifications

Certain prior period balances have been reclassified to conform to current period presentation of the Company’s condensed consolidated financial statements and accompanying notes. Such reclassifications have no effect on previously reported results of operations, accumulated deficit, subtotals of operating, investing or financing cash flows or consolidated balance sheet totals; however, for the period ended September 30, 2019, the Company reclassified $810,000 of changes in operating assets and liabilities to noncash lease expense in the statement of cash flows.

Use of Estimates

The preparation of unaudited interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent ~~assets and~~ liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. ~~Significant items~~Items subject to such estimates include: revenue recognition; ~~contractual allowances;~~write-down of supplies; the useful lives of property and equipment; the recoverability of long-lived assets; the incremental borrowing rate for leases; the estimation of the fair value of intangible ~~assets;~~assets and contingent consideration; variable interest entity assessment; impairment of equity investment, at cost; stock options; income tax uncertainties, including a valuation allowance for deferred tax assets; reserve on accounts receivable and contingencies. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions.

Table of Contents

VERACYTE, INC.

Notes to Financial Statements

(unaudited)

Issuance of Common Stock in a Public Offering

On August 7, 2020, the Company issued and sold 6,900,000 shares of common stock in a registered public offering, including 900,000 shares issued and sold upon the underwriters’ exercise in full of their option to purchase additional shares, at a price to the public of $30.00 per share. The Company's net proceeds from the offering were approximately $193.8 million, after deducting underwriting discounts and commissions and offering expenses of $13.2 million.

On May 7, 2019, the Company issued and sold 6,325,000 shares of common stock in a registered public offering, including 825,000 shares issued and sold upon the underwriters’ exercise in full of their option to purchase additional shares, at a price to the public of $23.25 per share. The Company's net proceeds from the offering were approximately $137.8 million, after deducting underwriting discounts and commissions and offering expenses of $9.2 million.

Cash and Cash Equivalents

The Company considers demand deposits in a bank, money market funds and highly liquid investments with an original maturity of 90 days or less to be cash equivalents. Cash equivalents include overnight reverse repurchase agreements which are tri-party repurchase agreements and have maturities of three months or less at the time of investment and are collateralized by U.S. treasury and agency securities of at least 102% of the principal amount. In a tri-party repurchase agreement, a third-party custodian bank functions as an independent intermediary to facilitate transfer of cash and holding the collateral on behalf of the underlying investor for the term of the agreement thereby minimizing risk and exposure to both parties. These overnight reverse repurchase agreements are included within cash equivalents due to their high liquidity and relatively low risk. There were 0 overnight reverse repurchase agreements at September 30, 2020.

Equity Investment

In July 2020, the Company invested $1.0 million in the preferred stock of MAVIDx, Inc., or MAVIDx, a company developing a diagnostic platform for infectious diseases testing. MAVIDx is a variable interest entity, or VIE, and the Company's investment is a variable interest. The Company has determined that it is not the primary beneficiary of the VIE due to the fact that the Company does not have the power to direct the activities that impact the economic performance of MAVIDx or the obligation to fund its operations with ongoing financial support or contributions. MAVIDx is a private company and its equity securities are not traded or quoted in any securities exchange or in the over-the-counter market, and therefore does not have a readily determinable fair value. As such, the Company has elected to measure its investment in the preferred stock at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar equity financings of MAVIDx, in accordance with Accounting Standards Codification, or ASC 321, Investments—Equity Securities. As of September 30, 2020, the investment is recorded at $1.0 million, and is included in other assets in the condensed consolidated balance sheets. NaN indicators of impairment were identified as of September 30, 2020.

Concentrations of Credit Risk and Other Risks and Uncertainties

The worldwide spread of coronavirus, or COVID-19, has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of COVID-19 and the extent to which COVID-19 impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict. If the financial markets or the overall economy are impacted for an extended period, the Company’s liquidity, revenues, supplies, goodwill and intangibles may be adversely affected. The Company considers the effects of COVID-19 pandemic in developing our estimates.

The majority of the Company’s cash and cash equivalents are deposited with one major financial institution in the United States. Deposits in this institution may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents.

Several of the components of the Company’s sample collection ~~kit~~kits and test reagents, and the nCounter system and related diagnostic kits are obtained from single-source suppliers. If these single-source suppliers fail to satisfy the Company’s requirements on a timely basis, it could suffer delays in being able to deliver its diagnostic solutions, a possible loss of revenue, or incur higher costs, any of which could adversely affect its operating results.

The Company is also subject to credit risk from its accounts receivable related to its sales. Credit risk for accounts receivable from testing revenue is incorporated in testing revenue accrual rates as the Company assesses historical collection rates and current developments to determine accrual rates and amounts the Company will ultimately collect. The Company generally does not perform evaluations of customers’ financial condition for testing revenue and generally does not require collateral.

~~Through~~ The Company assesses credit risk and the amount of accounts receivable the Company will ultimately collect for product, biopharmaceutical and collaboration revenue based on collection history, current developments and credit worthiness of the customer. The estimate of credit losses is not material at September 30, ~~2017,~~2020.

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VERACYTE, INC.

Notes to Financial Statements

(unaudited)

Through September 30, 2020, most of the Company’s revenue has been derived from the sale of Afirma. To date, Afirma has been delivered primarily to physicians in the United States. The Company’s ~~third-party~~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 September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Medicare 26 % 23 % 26 % 27 %
UnitedHealthcare 14 % 11 % 14 % 12 %
40 % 34 % 40 % 39 %

	*Three Months Ended September 30,*						*Nine Months Ended September 30,*
	*2020*			*2019*			*2020*			*2019*
Medicare		25	%		26	%		24	%		24	%
Johnson and Johnson Services, Inc.		*			13	%		*			12	%
UnitedHealthcare		11	%		11	%		11	%		11	%
		36	%		50	%		35	%		47	%

^{*Less than 10%}

The Company’s ~~significant third-party~~third-party payers and other customers in excess of 10% of accounts receivable and their related accounts receivable balance as a percentage of total accounts receivable were as ~~follows:~~

September 30,
2017 December 31, 2016
Medicare 17 % 18 %

~~No other third-party payer represented more than 10% of~~follows at the ~~Company’s accounts receivable balances as of those dates.~~

following dates:

	*September 30, 2020*			*December 31, 2019*
Johnson and Johnson Services, Inc.		*			10	%
Medicare		12	%		15	%
UnitedHealthcare		10	%		*

*Less than 10%

Restricted Cash

The Company ~~had deposits of $120,000 included in current assets as of December 31, 2016, pledged for corporate credit cards and there was no such restricted amounts as of September 30, 2017. The Company also~~ had deposits of $603,000 included in long-term assets as of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, restricted from withdrawal and held by a bank in the form of collateral for an irrevocable standby letter of credit held as security for the lease of the Company’s South San Francisco facility.

Revenue Recognition

Testing Revenue

The Company recognizes testing revenue in accordance with the ~~provision~~provisions of ASC ~~954-605,~~ ~~Health Care Entities —~~606, Revenue ~~Recognition~~ ("from Contracts with Customers, or ASC ~~954")~~. ~~The~~606. Most of the Company’s revenue is generated from the provision of ~~diagnostic~~testing services. ~~The service is~~These services are completed upon the delivery of test results to the prescribing physician, at which time the Company bills for the ~~service.~~services. The Company recognizes revenue related to billings ~~for tests delivered~~based on ~~an accrual basis when amounts that will ultimately be realized can be estimated. The~~ estimates of amounts that will ultimately be realized require significant judgment by management. Until a contract has been negotiated with a commercial payer or governmental program, the Company's tests may or may not be covered by these entities’ existing reimbursement policies. In addition, patients do not enter into direct agreements with the Company that commit them to pay any portion of the cost of the tests in the event that their insurance declines to reimburse the Company.

The Company may bill the patient directly for these amounts in the form of co-payments and co-insurance in accordance with their insurance carrier and health plans. In the absence of the ability to estimate the amount that will ultimately be ~~realized for the Company’s services, revenue is recognized on the cash basis.~~

~~Revenue recognized for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands of dollars):~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 % 2016 % 2017 % 2016 %
Revenue recognized on the accrual basis $ 17,257
99 % $ 13,903
75 % $ 50,007
96 % $ 31,478
67 %
Revenue recognized on the cash basis 262
1 % 4,700
25 % 2,350
4 % 15,350
33 %
Total $ 17,519
100 % $ 18,603
100 % $ 52,357
100 % $ 46,828
100 %

Prior to July 1, 2016, the Company accrued less than 50% of the billed Afirma genomic test volume per fiscal period. The Company believed it did not have a consistent enough payment history to accrue the remaining Afirma genomic classifier tests delivered to customers and, as noted above, recognized revenue on the cash basis for such tests. The Company has been analyzing the amounts received for tests performed since commercialization, and during the quarter ended September 30, 2016, sufficient information developed to support a reasonable estimate of the amount of revenue to accrue upon test delivery for a number of payers that had been previously recognized on the cash basis. As a result, starting in the quarter ended September 30, 2016, the Company began accruing substantially all of its billed Afirma genomic test volume.realized. In determining the amount to accrue for a ~~particular~~delivered test, the Company ~~considered~~considers factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and the Company, ~~timeliness of payment,~~ payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. These estimates require significant judgment by management. Actual results could differ from those estimates and assumptions.

During 2020, the Company changed its revenue estimates due to actual and anticipated cash collections for tests delivered in prior quarters and recognized additional revenue of $0.3 million and $1.2 million for the three and nine months ended September 30, 2020, respectively. These adjustments resulted in decreases in the Company's loss from operations of $0.3 million and $1.2 million and a decrease in basic and diluted net loss per share of zero and $0.02 for the three and nine months ended September 30, 2020, respectively.

During 2019, the Company changed its revenue estimates due to actual and anticipated cash collections for tests delivered in prior quarters and recognized additional revenue of $0.1 million and $0.8 million for the three and nine months ended September 30, 2019, respectively. These adjustments resulted in decreases in the Company's loss from operations of $0.1 million and $0.8 million and a decrease in basic and diluted net loss per share of zero and $0.02 for the three and nine months ended September 30, 2019, respectively.

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VERACYTE, INC.

Notes to Financial Statements

(unaudited)

Product Revenue

The Company began recognizing product revenue in December 2019, when the Company executed an agreement with NanoString for the exclusive global license to the nCounter platform and acquisition of products for diagnostic use. More details on this agreement are in Note 4 - Business Combination.

Product revenue from instruments and diagnostic kits is recognized generally upon shipment or when the instrument is ready for use by the end customer, which is when title of the product has been transferred to the customer. This process involves identifying the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available to the customer and is separately identified in the contract. Performance obligations are considered satisfied once the Company has transferred control of a product to the customer, meaning the customer has the ability to use and obtain the benefit of the product. The Company recognizes product revenue for satisfied performance obligations only when there are no uncertainties regarding payment terms or transfer of control. Shipping and handling costs incurred for product shipments are charged to the Company's customers and included in product revenue. Revenues are presented net of the taxes that are collected from customers and remitted to governmental authorities and net of estimated return reserves, if any.

Biopharmaceutical and Collaboration Revenue

From time to time, the Company enters into arrangements for research and development and/or laboratory services. Such arrangements may require the Company to deliver various rights, services and/or samples, including intellectual property rights/licenses, R&D services, and/or laboratory services. The underlying terms of these arrangements generally provide for consideration to the Company in the form of nonrefundable upfront license fees, development and commercial performance milestone payments, royalty payments, and/or profit sharing.

In arrangements involving more than one performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or service is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on its respective relative stand-alone selling price. The estimated selling price of each deliverable reflects the Company's best estimate of what the selling price would be if the deliverable was regularly sold by the Company on a stand-alone basis.

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

Collaborative Arrangements

The Company enters into collaborative arrangements with partners that fall under the scope of ASC Topic 808, Collaborative Arrangements, or ASC 808. While these arrangements are in the scope of ASC 808, the Company may analogize to ASC 606 for some aspects of these arrangements. The Company analogizes to ASC 606 for certain activities within the collaborative arrangement for the delivery of a good or service (i.e., a unit of account) that is part of its ongoing major or central operations.

The terms of the Company’s collaborative arrangements typically include one or more of the following: (i) up-front fees; (ii) milestone payments related to the achievement of development, regulatory, or commercial goals; and (iii) royalties on net sales of licensed products. Each of these payments may result in collaboration revenues or an offset against research and development expense.

Net sales of data or other services to our customers are classified under biopharmaceutical revenue, and all other non-customer revenue are classified under collaboration revenue in our consolidated statements of operations and comprehensive loss. There was 0 collaboration revenue in the three and nine months ended September 30, 2020.

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VERACYTE, INC.

Notes to Financial Statements

(unaudited)

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

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

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

Services Agreement with Loxo Oncology

On April 9, 2018, the Company entered into an agreement with Loxo Oncology, Inc., or Loxo, whereby the Company agreed to provide certain tissue samples and other services in exchange for agreed-upon fees. The agreement has a term of one year that automatically renews each year for a one-year period, and Loxo may terminate the agreement at any time with at least 90 days' notice. As of September 30, 2020, the agreement has not been terminated. The Company evaluated the accounting for this agreement under ASC 606 and concluded the performance obligations thereunder are the delivery of tissue samples and performance of services, both of which are distinct. For the nine months ended September 30, 2019, the Company recognized ~~$3.5~~revenue of $90,000 for the delivery of tissue samples. There were 0 deliveries of tissue samples for the nine months ended September 30, 2020. The Company recognized revenue of $0.3 million and $0.8 million for the performance of services for the three and nine months ended September 30, 2020, respectively. The cost of revenue associated with revenue recognized under the agreement with Loxo is not significant. There was 0 deferred revenue related to this agreement at either September 30, 2020 or December 31, 2019.

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VERACYTE, INC.

Notes to Financial Statements

(unaudited)

Diagnostic Development Agreement with Johnson & Johnson

On December 28, 2018, the Company entered into a diagnostics development agreement with Johnson and Johnson Services, Inc., or JJSI, (i) to cooperate on a program to enable the Company to use JJSI samples and clinical data to develop a next generation bronchial genomic classifier diagnostic for lung cancer diagnosis, or Percepta v.2, and a nasal genomic classifier diagnostic for lung cancer and (ii) for JJSI to use Veracyte data generated in two Veracyte development programs for therapeutic purposes and for purposes of developing a companion diagnostic product used in conjunction with a JJSI therapeutic. The Company granted a license to JJSI with the right to use data and under the Company's intellectual property rights for JJSI's therapeutic purposes, including the development and commercialization of a companion diagnostic for its products, from the Percepta v.2 and Nasal programs. The license granted to JJSI is not distinct from other performance obligations as JJSI receives benefit only when other performance obligations are met.

Under the terms of the agreement, the Company will provide data from its RNA whole-transcriptome sequencing platform to JJSI in exchange for $7.0 million in payments from JJSI. The Company is also entitled to additional payments from JJSI of up to $13.0 million, conditioned upon the achievement of certain milestones relating to the development and reimbursement of the Percepta v.2 and Nasal tests. For a period of ten years commencing with the first commercial sale of the Percepta v.2 and Nasal tests, respectively, the Company will make payments to JJSI of one percent of net cash collections for Percepta v.2 and in the low-single digits of net cash collections for the Nasal test, depending on the number and timing of JJSI samples and associated clinical data the Company receives from JJSI. On December 18, 2019, this agreement was amended for the Company to provide further data in exchange for additional consideration, most of which the Company provided during the nine months ended September 30, 2020 and recognized $1.5 million of ~~incremental~~revenue.

The JJSI agreement is considered to be within the scope of ASC 808, as the parties are active participants and exposed to the risks and rewards of the collaborative activity. The Company evaluated the terms of the JJSI agreement and has analogized to ASC 606 for the delivery of RNA whole-transcriptome sequencing data to JJSI under the collaborative arrangement, which the Company believes is a distinct service for which JJSI meets the definition of a customer. Using the concepts of ASC 606, the Company has identified the delivery of data as its only performance obligation. The Company further determined that the transaction price under the arrangement was the $7.0 million in payments which was allocated to the obligation to deliver data. The $13.0 million in future potential payments is considered variable consideration because the Company determined that the potential payments are contingent upon regulatory and commercialization milestones that are uncertain to occur and, as such, were not included in the transaction price, and will be recognized accordingly as each potential payment becomes probable.

The Company recognized revenue of $0.3 million and $1.5 million for three and nine months ended September 30, 2020, respectively, for the provision of data relating to the Nasal program. For the three and nine months ended September 30, 2019, the Company recognized revenue of $2.0 million and $7.0 million, respectively, for the provision of data relating to Percepta v.2 and the Nasal test, classified under biopharmaceutical revenue in the condensed consolidated statement of operations and comprehensive loss. In addition, the Company recognized revenue of $2.0 million and $4.0 million for fulfillment of obligations relating to Percepta v.2 development milestones during the ~~quarter~~three and nine months ended September 30, ~~2016 upon test delivery that previously would not have been recognized until cash~~2019, respectively. Accounts receivable from JJSI was ~~received. Tests performed prior~~$0.8 million at September 30, 2020 and $2.0 million at December 31, 2019. There was 0 deferred revenue related to ~~July 1, 2016 that did not meet the Company’s accrual criteria~~this agreement at ~~the time of delivery will continue to be recognized as revenue on the cash basis. In the quarter ended June~~September 30, ~~2017, as a result of the related cash collections being higher than previously estimated~~2020 and ~~cash collection trends,~~ December 31, 2019.

Collaboration Agreement with AstraZeneca Group

On December 23, 2019, the Company ~~updated its revenue estimates~~entered into an agreement with Acerta Pharma B.V., or Acerta, a member of AstraZeneca Group whereby the Company agreed to provide genomic information that will support Acerta’s development of oncology therapeutics. Acerta will pay the Company for certain development activities and pay milestones to the Company for the achievement of development milestones. For the three and nine months ended September 30, 2020, the Company recognized ~~an additional $1.0~~$0.3 million and $0.7 million, respectively, of revenue for certain development activities and zero and $1.0 million, respectively, for the achievement of development milestones. Accounts receivable from Acerta was $0.5 million at September 30, 2020.

Commercial Development Agreement with CareDx

On May 13, 2020, the Company entered into a commercial development agreement with CareDx, Inc., or CareDx, under which the Company provided to CareDx the right to develop and commercialize solid organ transplant-rejection tests ~~performed~~on the nCounter platform in exchange for a $1.0 million upfront payment, and is entitled to additional payments from CareDx of up to $4.5 million, conditioned upon the ~~six months ended December 31, 2016.~~

~~Recent Accounting Pronouncements~~

~~In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers~~ ~~(Topic 606), to supersede nearly all existing revenue recognition guidance under GAAP. The core principle~~achievement of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP.commercial milestones. The Company will ~~adopt~~also provide certain development support services to CareDx in exchange for $0.5 million. For the ~~new~~three and nine months ended September 30, 2020, the Company recognized zero and $1.0 million, respectively, as biopharmaceutical revenue ~~standard~~for the upfront payment as the Company has 0 remaining performance obligations. There was 0 accounts receivable from CareDx at September 30, 2020.

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VERACYTE, INC.

Notes to Financial Statements

(unaudited)

Cost of Testing Revenue

The components of our cost of testing services are laboratory expenses, sample collection expenses, compensation expense, license fees and royalties, depreciation and amortization, other expenses such as equipment and laboratory supplies, and allocations of facility and information technology expenses. Costs associated with performing tests are expensed as the test is processed regardless of whether and when revenue is recognized with respect to that test. Cost of testing revenue for the nine months ended September 30, 2020 included a $1.1 million write-down of supplies for the potential expiration of reagents due to an anticipated decline in volumes resulting from the COVID-19 pandemic.

Cost of Product Revenue

Cost of product revenue consists primarily of costs of purchasing instruments and diagnostic kits from third-party contract manufacturers, installation, service and packaging and delivery costs. In addition, cost of product includes royalty costs for licensed technologies included in the Company’s products and labor expenses. Cost of product revenue for instruments and diagnostic kits is recognized in the period the related revenue is recognized. Shipping and handling costs incurred for product shipments are included in cost of product in the condensed consolidated statements of operations and comprehensive loss.

Cost of Biopharmaceutical Revenue

Cost of biopharmaceutical revenue consists of costs of performing activities under arrangements that require the Company to perform research and development services on behalf of a customer pursuant to a biopharmaceutical service agreement.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No.2016-13,Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings and report credit losses using an expected losses model rather than the incurred losses model that was previously used, and establishes additional disclosures related to credit risks. This guidance became effective for the Company beginning January 1, ~~2018 using~~2020. Based on the ~~modified retrospective method. The Company has completed~~composition of its ~~assessment of the five steps of this ASU~~trade receivables, investment portfolio and ~~believes that~~other financial assets, current economic conditions and historical credit loss activity, the adoption of this ~~ASU will~~ standard did not ~~result in a material cumulative catch-up adjustment under the modified retrospective method, or~~ have a material impact on the Company's condensed consolidated financial ~~position or results of operations.~~

statements and related disclosures.

In ~~February 2016,~~ November 2018, the FASB issued ASU No. ~~2016-2,~~ ~~Leases~~2018-18,Collaborative Arrangements (Topic 808). ~~This~~Under this ASU, ~~is aimed at making leasing activities more transparent and comparable, and requires substantially all leases~~transactions in collaborative arrangements are to be ~~recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently~~ accounted for ~~as operating leases. The ASU will be effective~~under ASC 606 if the counterparty is a customer for ~~interim~~a good or service (or bundle of goods and ~~annual periods beginning after December 15, 2018. Entities~~services) that is a distinct unit of account. Also, entities are ~~required to use~~precluded from presenting consideration from transactions with a ~~modified retrospective approach for leases~~counterparty that ~~exist or are entered into after the beginning of the earliest comparative period in the financial statements.~~

~~Full retrospective application~~ is ~~prohibited and early adoption is permitted. The Company is currently evaluating the potential effect of this standard on its financial statements.~~

~~In March 2016, the FASB issued ASU 2016-9,~~ ~~Compensation - Stock Compensation~~, related to the tax effects of share-based awards. The ASU requires that all the tax effects of share-based awards be recorded through the income statement, thereby simplifying the current guidance that requires excess tax benefits and certain excess tax deficiencies to be recorded in equity. This ASU also permits an election for the impact of forfeitures on the recognition of expense for share-based payment awards where forfeitures can be estimated ornot a customer together with revenue recognized ~~when they occur.~~from ASC 606. This ASU is effective for all interim and annual reporting periods beginning on or after December 15, ~~2016.~~2019, with early adoption permitted. The Company adopted this ASU as of January 1, 2017 and elected to continue using its forfeiture estimation method for share-based payment awards. This ASU was adopted prospectively and the impact of adoption on the Company's financial statements was not material.

in 2019 with no cumulative-effect adjustments or retrospective impact.

In ~~November 2016,~~ August 2018 the FASB issued ASU ~~2016-18,~~ ~~Statement of Cash Flows~~ No.2018- ~~Restricted Cash.~~ 15,Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ~~ASU requires that restricted cash~~ standard clarifies the accounting for implementation costs in cloud computing arrangements. This standard became effective for the Company on January 1, 2020 and ~~restricted cash equivalents be included~~was adopted on a prospective basis with ~~cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown~~no material impact on the ~~statement~~Company's condensed consolidated financial statements.

In August 2018, the FASB issued ASU No.2018-13,Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. ASU 2018-13 removed the following disclosure requirements: (1) the amount of ~~cash flows. The~~and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. Additionally, this update added the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income and loss for recurring Level 3 fair value measurements held at the end of the reporting period; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU ~~will be~~2018-13 became effective for ~~interim~~the Company beginning January 1,2020 and ~~annual periods beginning after December 15, 2017. The Company does not anticipate that~~ the adoption of ~~this~~ ASU ~~will~~2018-13 did not have a ~~significant~~material impact on ~~its~~the Company’s condensed consolidated financial statements. For the disclosures regarding the Company’s Level 3 fair value measurements, see Note 5, Fair Value Measurements to these condensed consolidated financial statements

2. Net Loss Per Common Share

Basic net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. The following outstanding common stock equivalents have been excluded from diluted net loss per common share because their inclusion would be anti-dilutive:

	*Three Months Ended September 30,*				*Nine Months Ended September 30,*
	*2020*		*2019*		*2020*		*2019*
Shares of common stock subject to outstanding options		4,492,414		5,299,296		4,691,424		5,562,611
Employee stock purchase plan		15,673		51,253		20,151		32,272
Restricted stock units		891,087		780,914		929,968		691,647
Total common stock equivalents		5,399,174		6,131,463		5,641,543		6,286,530

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Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Shares of common stock subject to outstanding options 6,322,215
5,312,081
6,134,966
5,031,926
Employee stock purchase plan 25,481
29,435
31,944
34,262
Restricted stock units 70,000
—
59,945
—
Total common stock equivalents 6,417,696
5,341,516
6,226,855
5,066,188

VERACYTE, INC.

Notes to Financial Statements

(unaudited)

3. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands of dollars):

	*September 30, 2020*		*December 31, 2019*
Accrued compensation expenses	$	8,382	$	10,100
Accrued other		2,063		3,634
Total accrued liabilities	$	10,445	$	13,734

4. Business Combination

On December 3, 2019, the Company executed an agreement with NanoString for the exclusive global diagnostics license to the nCounter Analysis System, and the acquisition of the Prosigna breast cancer prognostic gene signature assay, and the LymphMark lymphoma subtyping assay. The strategic transaction positions the Company to expand its genomic diagnostics business globally, with the ability to deliver its advanced genomic tests to physicians and their patients via hospital and clinical laboratories throughout the European Union and other parts of the world. The Company has accounted for this agreement under ASC 805, Business Combinations. Pursuant to the terms of the agreement, Veracyte paid NanoString $40.0 million in cash and $10.0 million in Veracyte common stock, and may pay up to an additional $10.0 million in cash, contingent upon the commercial launch of Veracyte diagnostic tests for use on the platform. This contingency was valued at $6.1 million as of the acquisition date and as of December 31, 2019, recorded as a liability, and will be remeasured to fair value at each reporting date until the contingent consideration is settled. As of September 30, 2020, this contingency was remeasured to $6.4 million with the corresponding change included in general and administrative expense in the Company's condensed consolidated statements of operations and comprehensive loss.

Assets acquired are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and the resulting amount of goodwill. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

Prosigna product technology	$	4,120
Prosigna customer relationships		2,430
nCounter Dx license		46,880
LymphMark product technology		990
Total identifiable intangible assets acquired		54,420
Goodwill		1,668
Net assets acquired	$	56,088

Identifiable acquisition-related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows:

	*Estimated Useful life (In Years)*
Prosigna product technology		15
Prosigna customer relationships		5
nCounter Dx license		15
LymphMark product technology		7

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. This acquisition includes $1.7 million of goodwill which the Company believes consists principally of the organized workforce that will help the Company execute its strategic plans in relation to the assets acquired. In accordance with ASC 350, goodwill will not be amortized but will be tested for impairment at least annually. As of September 30, 2020, goodwill is not deductible for tax purposes, however, if contingent consideration is paid at a future date, the portions of contingent consideration paid and allocated to the intangible assets for tax purposes will be tax deductible. The accounting for this acquisition is preliminary and will be finalized upon completion of the analysis of certain contracts acquired and executed as part of this acquisition along with the impact on goodwill, should there be any.

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September 30,
2017 December 31,
2016
Accrued compensation expenses $ 4,966
$ 6,120
Accrued other 3,092
2,990
Total accrued liabilities $ 8,058
$ 9,110

VERACYTE, INC.

Notes to Financial Statements

(unaudited)

5. Fair Value Measurements

The Company ~~recognizes~~records its financial assets and liabilities at fair value. The carrying amounts of certain financial instruments of the Company, including cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The carrying value of the Company’s debt approximates its fair value because the interest rate approximates market rates that the Company could obtain for debt with similar terms. The estimated fair value of the Company’s debt is estimated using the net present value of the payments, discounted at an interest rate that is consistent with market interest rates, which is a Level II input. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value, and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a ~~three-tiered~~three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows:

~~Level I: Inputs which include quoted prices in active markets for identical assets and liabilities.~~

Level II: Inputs other than Level I that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

~~Level III: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.~~

•

Level I: Inputs which include quoted prices in active markets for identical assets and liabilities;

•

Level II: Inputs other than Level I that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

•

Level III: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value of the Company’s financial assets ~~which consist only of~~includes money market funds, ~~was $40.7~~overnight reverse repurchase agreements and a deposit for the lease of the Company's South San Francisco facility. Money market funds, included in cash and cash equivalents in the accompanying condensed consolidated balance sheets, were $343.4 million and ~~$58.7~~$57.6 million as of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively, and are Level I assets as described above.

Overnight reverse repurchase agreements, included in cash and cash equivalents in the accompanying condensed consolidated balance sheets, were zero and $100.0 million as of September 30, 2020 and December 31, 2019, respectively, and are Level II assets as described above. There were no unrealized gains or losses from overnight reverse repurchase agreements at September 30, 2020 and December 31, 2019. The deposit for the lease, included in restricted cash in the accompanying condensed consolidated balance sheets, was $603,000 as of September 30, 2020 and December 31, 2019, and is a Level I asset as described above.

The fair value of the contingent consideration in Note 4, Business Combination, associated with the agreement with NanoString on December 3, 2019, includes inputs that are not observable in the market and thus represent a Level III financial liability. The estimation of the fair value of the contingent consideration is based on the present value of the expected payments calculated by assessing the likelihood of when the related milestones would be achieved, discounted using the Company's estimated borrowing rate. These estimates form the basis for making judgments about the carrying value of the contingent consideration that are not readily apparent from other sources. Changes to the forecasts for the achievement of the milestones and the estimates of the borrowing rate can significantly affect the estimated fair value of the contingent consideration. As of September 30, 2020, the achievement of the milestones is not forecasted to occur within the next 12 months. As a result, the contingent consideration is included in long term liabilities in the condensed consolidated balance sheets. As of September 30, 2020, the Company calculated the estimated fair value of the milestones using the following significant unobservable inputs:

		Value or Range
Unobservable input		(Weighted-Average)
Discount rate		8.7%
Probability of achievement		50% - 100% (80%)

6. Commitments and Contingencies

Operating Leases

The Company leases its headquarters and laboratory facilities in South San Francisco, California under a non-cancelable lease agreement for approximately 59,000 square feet. The lease began in June 2015 and ends in March 2026 and contains extension of lease term and expansion options. ~~In February 2017, the Company relinquished certain expansion rights for a nominal fee.~~ The Company had deposits of $603,000 included in long-term assets as of September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, restricted from withdrawal and held by a bank in the form of collateral for an irrevocable standby letter of credit held as security for the lease of the South San Francisco facility.

The Company also leases laboratory and office space in Austin, Texas under a lease that expires in January 2029 and includes options for expansion and early termination in 2025. The ~~related~~Company provided a cash security deposit for this lease of $139,000, ~~as of September 30, 2017 and $75,000 as of December 31, 2016 is~~ included in other assets in the Company’s condensed consolidated balance ~~sheets.~~sheets as of September 30, 2020 and December 31, 2019.

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VERACYTE, INC.

Notes to Financial Statements

(unaudited)

Future minimum lease payments under non-cancelable operating leases as of September 30, ~~2017~~2020 are as follows (in thousands of dollars):

Year Ending December 31,
Remainder of 2017 $ 539
2018 2,121
2019 2,227
2020 2,332
2021 2,401
Thereafter 11,856
Total minimum lease payments $ 21,476

Year Ending December 31,
Remainder of 2020	$	588
2021		2,401
2022		2,472
2023		2,543
2024		2,614
Thereafter		4,227
Total future minimum lease payments		14,845
Less: amount representing interest		2,972
Present value of future lease payments		11,873
Less: short-term lease liabilities		1,542
Long-term lease liabilities	$	10,331

The Company recognizes ~~rent~~operating lease expense on a straight-line basis over the non-cancelable lease period. ~~Rent~~Operating lease expense was ~~$469,000 and $457,000~~$0.5 million for each of the three months ended September 30, ~~2017~~ 2020 and ~~2016, respectively,~~2019 and $1.4 million ~~and $1.5 million~~ for each of the nine months ended September 30, ~~2017~~ 2020 and ~~2016, respectively.~~

2019.

Contingencies

From time to time, the Company may be involved in legal proceedings arising in the ordinary course of business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its condensed consolidated financial statements. An estimated loss contingency is accrued in the financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company believes there is no ~~litigation~~ legal proceeding pending that could have, either individually or in the aggregate, a material adverse effect on the Company’s condensed consolidated financial ~~position, results of operations or cash flows.~~

statements.

7. Debt

~~Credit Agreement~~

In March 2016, the Company entered into a credit agreement (the “Credit Agreement”) with Visium Healthcare Partners, LP (“Visium”). Under the Credit Agreement, two term loans were available to the Company with an aggregate principal amount of up to $40.0 million. The Company drew down the initial $25.0 million term loan (the “Term Loan”) on March 30, 2016, of which $5.0 million was used to pay the outstanding balance of the Company’s existing long-term debt, which was cancelled at that date. On or prior to June 30, 2017, the Company was permitted to request a second term loan of up to $15.0 million; however, the Company did not draw down the second term loan and it expired. The Term Loan matures on March 31, 2022.

The Term Loan bears interest at a fixed rate of 12.0% per annum, payable quarterly at the end of each March, June, September and December. No principal payments will be due during an interest-only period, commencing on the funding date for the Term Loan (the “Borrowing Date”) and continuing through and including March 31, 2020. The Company is obligated to repay the outstanding principal amount under the Term Loan in eight equal installments during the final two years under the Credit Agreement. For any quarterly interest payment through and including the 16th interest payment date after the Borrowing Date, so long as no event of default has occurred and is then continuing, the Company may elect to pay interest in cash on the outstanding principal amount of the Term Loan at a fixed rate of 9.0%, with the remaining 3.0% of the 12.0% interest paid-in-kind by adding such paid-in-kind interest to the outstanding principal amount of the Term Loan. The Company elected to pay interest in-kind for the quarters ended June 30, 2016 and September 30, 2016 and has recorded a total of $385,000 of paid-in-kind interest through September 30, 2017.

The Company may prepay the outstanding principal amount under the Term Loan subject to a minimum of $5.0 million of principal amount or a whole multiple of $1.0 million in excess thereof plus accrued and unpaid interest and a prepayment premium. The prepayment premium will be assessed on the principal amount repaid and will equal (i) 24.0% less the aggregate amount of all interest payments in cash, if the prepayment is made on or prior to March 31, 2018, (ii) 4.0%, if the prepayment is made after March 31, 2018 and on or prior to March 31, 2019, (iii) 2.0%, if the prepayment is made after March 31, 2019 and on or prior to March 31, 2020, and (iv) 1.0%, if the prepayment is made after March 31, 2020 and on or prior to March 31, 2021. After March 31, 2021 there is no prepayment premium.

The Company’s obligations under the Credit Agreement are secured by a security interest in substantially all of its assets. The Credit Agreement contains customary representations, warranties and events of default, as well as affirmative and negative covenants. The negative covenants include, among other provisions, covenants that limit or restrict the Company’s ability to incur liens, make investments, incur indebtedness, merge with or acquire other entities, dispose of assets, make dividends or other distributions to holders of its equity interests, engage in any material new line of business or enter into certain transactions with affiliates, in each case subject to certain exceptions. To the extent the Company forms or acquires certain subsidiaries domiciled in the United States, those subsidiaries are required to be guarantors of the Company’s obligations under the Credit Agreement. As of September 30, 2017, the Company was in compliance with the loan covenants.

~~See Note 11. Subsequent Events for additional information.~~

~~As of September 30, 2017, the net debt obligation for borrowings made under the Credit Agreement was as follows (in thousands of dollars):~~

September 30, 2017
Debt principal $ 25,385
Unamortized deferred debt issuance costs (388 )
Net debt obligation $ 24,997

~~Future principal payments under the Credit Agreement are as follows (in thousands of dollars):~~

Year Ending December 31,
2020 $ 9,519
2021 12,693
2022 3,173
Total $ 25,385

Loan and Security Agreement

~~In June 2013,~~

On November 3, 2017, the Company entered into a loan and security agreement, as subsequently amended (“2013 Loan Agreement”) with a financial institution that provided for borrowings of up to $10.0 million in aggregate. Borrowings under the 2013 Loan Agreement totaled $5.0 million, which was outstanding at January 1, 2016 until March 30, 2016 when it was repaid upon the Company entering into the Credit Agreement discussed above.

~~Interest Expense~~

~~Interest expense consists of the following (in thousands of dollars):~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Nominal interest $ 778
$ 772
$ 2,311
$ 1,600
Amortization and write-off of debt discount and debt issuance costs 27
27
79
145
Prepayment penalty —
—
—
50
End-of-term payment interest —
—
—
156
Interest on capital lease 10

—
33
—
Total $ 815
$ 799
$ 2,423
$ 1,951

~~7. Stockholders’ Equity~~

~~Common Stock~~

~~The Company had reserved shares of common stock for issuance as follows:~~

September 30,
2017 December 31, 2016
Stock options and restricted stock units issued and outstanding 6,318,932
5,251,832
Stock options and restricted stock units available for grant under stock option plans 1,102,427
887,724
Common stock available for the Employee Stock Purchase Plan 456,002
609,053
Total 7,877,361
6,748,609

~~8. Genzyme Co-Promotion Agreement~~

In January 2012, the Company and Genzyme Corporation (“Genzyme”) executed a co-promotion agreement for the co-exclusive rights and license to promote and market the Company’s Afirma thyroid diagnostic solution in the United States and in 40 named countries. In exchange, the Company received a $10.0 million upfront co-promotion fee from Genzyme in February 2012 which was deferred and amortized over the life of the agreement until the agreement was terminated effective September 9, 2016. Under the terms of the agreement, Genzyme received a percentage of U.S. cash receipts that the Company has received related to the Afirma solution as co-promotion fees.

In February 2015, the Company entered into an ex-U.S. co-promotion agreement with Genzyme for the promotion of the Afirma solution with exclusivity in five countries outside the United States initially and in other countries agreed to from time to time. The agreement commenced on January 1, 2015 and continued until December 31, 2019, with extension of the agreement possible upon agreement of the parties. Pursuant to the agreement, the Company agreed to pay Genzyme 25% of net revenue from the sale of the Afirma solution in Brazil and Singapore over a five-year period commencing January 1, 2015. These payments have been immaterial for all periods presented. Effective July 6, 2017, the agreement was terminated.

The Company incurred $1.8 million and $6.1 million in co-promotion expense, excluding the amortization of the upfront co-promotion fee, in the three and nine months ended September 30, 2016, respectively, which is included in selling and marketing expenses in the condensed statements of operations and comprehensive loss. The Company had no outstanding obligations to Genzyme under the U.S. co-promotion agreement as of September 30, 2017 and December 31, 2016.

The Company amortized $227,000 and $948,000 of the $10.0 million upfront co-promotion fee in the three and nine months ended September 30, 2016, respectively, which is reflected as a reduction to selling and marketing expenses in the condensed statements of operations and comprehensive loss. No such related costs were incurred during the three and nine months ended September 30, 2017.

~~9. Thyroid Cytopathology Partners~~

In 2010, the Company entered into an arrangement with Pathology Resource Consultants, P.A. (“PRC”) to set up and manage a specialized pathology practice to provide testing services to the Company. There is no direct monetary compensation from the Company to PRC as a result of this arrangement. The Company’s service agreement is with the specialized pathology practice, Thyroid Cytopathology Partners (“TCP”), and was effective through December 31, 2015, and thereafter automatically renews every year unless either party provides notice of intent not to renew at least 12 months prior to the end of the then-current term. Under the service agreement, the Company pays TCP based on a fixed price per test schedule, which is reviewed periodically for changes in market pricing. Subsequent to December 2012, an amendment to the service agreement allows TCP to sublease a portion of the Company’s facility in Austin, Texas. The Company does not have an ownership interest in or ~~provide any form of financial or other support to TCP.~~

The Company has concluded that TCP represents a variable interest entity and that the Company is not the primary beneficiary as it does not have the ability to direct the activities that most significantly impact TCP’s economic performance. Therefore, the Company does not consolidate TCP. All amounts paid to TCP under the service agreement are expensed as incurred and included in cost of revenue in the condensed statements of operations and comprehensive loss. The Company incurred $1.2 million and $1.3 million of expense for the three months ended September 30, 2017 and 2016, respectively, and $3.6 million and $3.8 million for the nine months ended September 30, 2017 and 2016, respectively, in cytopathology testing and evaluation services expenses with TCP. The Company’s outstanding obligations to TCP for cytopathology testing services were $395,000 and $426,000 as of September 30, 2017 and December 31, 2016, respectively, and are included in accounts payable on the accompanying condensed balance sheets.

TCP reimburses the Company for its proportionate share of the Company’s rent and related operating expenses for the leased facility. TCP’s portion of rent and related operating expenses for the shared space at the Austin, Texas facility was $25,000 and $24,000 for the three months ended September 30, 2017 and 2016, respectively, and $78,000 and $70,000 for the nine months ended September 30, 2017 and 2016, respectively, and is included in other income, net in the Company’s condensed statements of operations and comprehensive loss.

~~See Note 11. Subsequent Events for additional information.~~

~~10. Income Taxes~~

The Company did not record a provision or benefit for income taxes during the three and nine months ended September 30, 2017 and 2016. The Company continues to maintain a full valuation allowance against its net deferred tax assets.

As of September 30, 2017, the Company had unrecognized tax benefits of $2.5 million, none of which would currently affect the Company’s effective tax rate if recognized due to the Company’s net deferred tax assets being fully offset by a valuation allowance. The Company does not anticipate that the amount of unrecognized tax benefits relating to tax positions existing at September 30, 2017 will significantly increase or decrease within the next 12 months. There was no interest expense or penalties related to unrecognized tax benefits recorded through September 30, 2017.

A number of years may elapse before an uncertain tax position is audited and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its reserves for income taxes reflect the most likely outcome. The Company adjusts these reserves, as well as the related interest, in light of changing facts and circumstances. Settlement of any particular position could require the use of cash.

~~11. Subsequent Events~~

~~Thyroid Cytopathology Partners~~

On October 16, 2017, the Company amended and restated its service agreement with TCP. The agreement is effective through October 31, 2022, and thereafter automatically renews every year unless either party provides notice of intent not to renew at least 12 months prior to the end of the then-current term. In connection with amending and restating the TCP agreement, the Company’s arrangement with PRC was simultaneously assigned by PRC to TCP and immediately terminated, and the Company agreed to pay PRC a total of $1,750,000 over eight quarterly installments in exchange for TCP reducing the price per test it charges the Company during the term of the amended TCP agreement.

Loan and Security Agreement,

~~On November 3, 2017, the Company entered into a loan and security agreement (the “Loan and Security Agreement”)~~ with Silicon Valley Bank. In connection with the entry into the Loan and Security Agreement, the Company terminated the Credit Agreement with Visium, wherein all commitments were terminated, all liens were released and all outstanding principal and interest and fees accrued thereunder were repaid in the aggregate amount of $27.3 million. The Company expects to expense approximately $1.9 million in prepayment premium and debt issuance cost write-offs in the quarter ending December 31, 2017.

The Loan and Security Agreement allows the Company to borrow up to $35.0 million, with a $25.0 million advance term loan, ~~(the “Term~~or Term Loan ~~Advance”)~~Advance, and a revolving line of credit of up to $10.0 million, ~~(the “Revolving~~or Revolving Line of ~~Credit”).~~Credit. The Term Loan Advance was advanced upon the closing of the Loan and Security ~~Agreement.~~Agreement and was used to pay the outstanding balance of the Company’s existing long-term debt, which was canceled at that date. The Company had not drawn on the Revolving Line of Credit as of September 30, 2020. Borrowings under the Loan and Security Agreement mature in on October 1, 2022. Amounts may be borrowed and repaid under the Revolving Line of Credit up until the earliest of full repayment or maturity of the Loan and Security Agreement, termination of the Loan and Security Agreement, or October 1, 2022.

The Term Loan Advance bears interest at a variable rate equal to (i) the ~~thirty-day~~thirty-day U.S. London Interbank Offer Rate, ~~(“LIBOR”)~~or LIBOR, plus (ii) 4.20%, with a minimum rate of 5.43% per annum. Principal amounts outstanding under the Revolving Line of Credit bear interest at a variable rate equal to (i) LIBOR plus (ii) 3.50%, with a minimum rate of 4.70% per annum.

The average Term Loan Advance interest rate for the nine months ended September 30, 2020 was 5.5%.

The Company may prepay the outstanding principal amount under the Term Loan Advance plus accrued and unpaid interest and, if the Term Loan Advance is repaid in full, a prepayment premium. The prepayment premium will be (i) $750,000 if prepayment is made prior to November 3, 2018, (ii) $500,000 if the prepayment is made after November 3, 2018 but on or before November 3, 2019, or (iii) $250,000 if the prepayment is made after November 3, 2019. In January 2019, May 2019 and August 2020, the Company prepaid $12.5 million, $12.4 million and $0.1 million, respectively, of the principal amount of the Term Loan Advance. These prepayments did not trigger any prepayment premium because they were partial, not full, repayments of the principal amount.

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VERACYTE, INC.

Notes to Financial Statements

(unaudited)

In addition, a final payment on the Term Loan Advance in the amount of $1.2 million is due upon the earlier of the maturity date of the Term Loan Advance or its payment in full. The Loan and Security Agreement contains customary representations, warranties, and events of default such as a material adverse change in the Company's business, operations or financial condition, as well as affirmative and negative covenants. The negative covenants include, among other provisions, covenants that limit or restrict the Company's ability to incur liens, make investments, incur indebtedness, merge with or acquire other entities, dispose of assets, make dividends or other distributions to holders of its equity interests, engage in any new line of business, or enter into certain transactions with affiliates, in each case subject to certain exceptions. The Company’s obligations under the Loan and Security Agreement are secured by substantially all of its assets (excluding intellectual property), subject to certain customary exceptions.

The ~~net proceeds from~~Loan and Security Agreement also requires the ~~Term Loan Advance were used towards~~Company to achieve certain revenue levels tested quarterly on a trailing twelve-month basis. However, failure to maintain the ~~full repayment~~revenue levels will not be considered a default if the sum of the ~~outstanding balance~~Company’s unrestricted cash and cash equivalents maintained with Silicon Valley Bank and amount available under the Revolving Line of Credit ~~Agreement.~~is at least $40.0 million. As of September 30, 2020, the Company was in compliance with the loan covenants.

The debt obligation for borrowings made under the Loan and Security Agreement was as follows (in thousands of dollars):

	*September 30, 2020*		*December 31, 2019*
Debt principal	$	0	$	100
End-of-term debt obligation		756		594
Total debt obligation	$	756	$	694

As of September 30, 2020, the principal balance outstanding was one dollar. Future principal and end-of-term debt obligation payments under the Loan and Security Agreement are $1.2 million and due in 2022.

The end-of-term debt obligation accretes over the term of the Loan and Security Agreement until maturity and is included in interest expense in the Company's condensed consolidated statements of operations and comprehensive loss.

8. Stockholders’ Equity

Common Stock

The Company had reserved shares of common stock for issuance as follows:

	*September 30, 2020*		*December 31, 2019*
Stock options and restricted stock units issued and outstanding		5,279,277		5,562,484
Stock options and restricted stock units available for grant under stock option plans		3,036,308		1,954,804
Common stock available for the Employee Stock Purchase Plan		1,571,395		173,168
Total		9,886,980		7,690,456

9. Thyroid Cytopathology Partners

The Company has an agreement with a specialized pathology practice, Thyroid Cytopathology Partners, or TCP, to provide testing services to the Company (the TCP Agreement). The TCP Agreement is effective through October 31, 2022, and thereafter automatically renews every year unless either party provides notice of intent not to renew at least 12 months prior to the end of the then-current term. Under the TCP Agreement, the Company pays TCP based on a fixed price per test schedule which is reviewed periodically for changes in market pricing, and the TCP Agreement included a clause allowing TCP to sublease a portion of the Company's facility in Austin, Texas. The Company does not have an ownership interest in or provide any form of financial or other support to TCP. The Company previously concluded that TCP represented a variable interest entity as a result of the facility arrangement clause, but that the Company was not the primary beneficiary as it did not have the ability to direct the activities that most significantly impacted TCP's economic performance, and therefore did not consolidate TCP. On February 14, 2019, the TCP Agreement was amended to remove the facility clause. Accordingly, the Company believes TCP was no longer a variable interest entity as of that date.

TCP's portion of rent and related operating expenses reimbursed to the Company for the shared space at the Austin, Texas facility was $11,000 for the nine months ended September 30, 2019, and is included in other income, net in the Company’s condensed consolidated statements of operations and comprehensive loss.

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VERACYTE, INC.

Notes to Financial Statements

(unaudited)

10. Income Taxes

The Company did not record a provision or benefit for income taxes during the three and nine months ended September 30, 2020 and 2019. The Company continues to maintain a full valuation allowance against its net deferred tax assets.

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

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read together with the condensed consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q, and with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2019.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this report, the words "expects," "anticipates," "intends," "estimates," "plans," "believes," "continuing," "ongoing," and similar expressions are intended to identify forward-looking statements. These are statements that relate to future events and include, but are not limited to, the factors that may impact our financial results; our expectations regarding ~~our sources of~~ revenue; our expectations with respect to our future research and development, general and administrative and selling and marketing expenses and our anticipated uses of our funds; the impact of the COVID-19 pandemic on our business and the U.S. and global economies; our expectations regarding the return to pre-COVID-19 volume and revenue levels; our beliefs with respect to the optimization of our processes for the analysis of ribonucleic acid, or RNA, samples; our integration of the assets acquired from NanoString Technologies, Inc.; our ability to deploy the nCounter Analysis System successfully and run our tests on this platform worldwide; our beliefs with respect to the optimization of our processes for the analysis of ribonucleic acid, or RNA, samples; our collaboration with Johnson & Johnson Services, Inc.; our belief in the importance of maintaining libraries of clinical evidence; our expectations regarding the nasal swab classifier for early lung cancer detection, the Percepta Lung Cancer Atlas, the Envisia classifier on the nCounter system and the LymphMark lymphoma subtyping test; our expectations regarding our diagnostic company partnerships with CareDx, Inc. and MAVIDx, Inc.; our ability to have the targeted Atlas platform transferred to our pulmonology indications; our expectations regarding the Percepta Lung Cancer Atlas; our expectations regarding capital expenditures; our anticipated cash needs and our estimates regarding our capital requirements; the timing and success of our transition to a single platform for all of our classifiers and tests; our ability to maintain Medicare coverage for each of our tests; our need for additional financing; potential future sources of cash; our business strategy and our ability to execute our strategy; our ability to achieve and maintain reimbursement from third-party payers at acceptable levels and our expectations regarding the timing ~~and levels~~ of reimbursement; the estimated size of the global markets for our tests; the estimated number of patients who receive uncertain diagnoses who are candidates for our test; the attributes and potential benefits of our tests and any future tests we may develop to patients, physicians and payers; the factors we believe drive demand for and reimbursement of our tests; our ability to sustain or increase demand for our tests; our intent to expand into other clinical areas; our ability to develop new tests, and the timeframes for development or commercialization; our ability to get our data and clinical studies accepted in peer-reviewed publications; our dependence on and the terms of our agreement with TCP, and on other strategic relationships, and the success of those relationships; ~~potential cost savings resulting from our amended agreement with TCP;~~ our beliefs regarding our laboratory capacity; the potential for future clinical studies to contradict or undermine previously published clinical study results; the applicability of clinical results to actual outcomes; our expectations regarding our international expansion; the occurrence, timing, outcome or success of clinical trials or studies; the ability of our tests to impact treatment decisions; our beliefs regarding our competitive position; our compliance with federal, state and international regulations; the potential impact of regulation of our tests by the Food and Drug Administration, or FDA, or other regulatory bodies; the impact of new or changing policies, regulation or legislation, or of judicial decisions, on our business; the impact of seasonal fluctuations and economic conditions on our business; our ~~beliefs regarding the impact of recent hurricanes on our business; our~~ belief that we have taken reasonable steps to protect our intellectual property; our belief that our intellectual property will develop and maintain our competitive position; the impact of accounting pronouncements and our critical accounting policies, judgments, estimates, models and assumptions on our financial ~~results, including our expectations regarding implementing of new revenue recognition standards;~~results; and anticipated trends and challenges in our business and the markets in which we operate.

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

Forward-looking statements are based on our current plans and expectations and involve risks and uncertainties which could cause actual results to differ materially. These risks and uncertainties include, but are not limited to, those risks discussed in Part II, Item 1A of this report, as well as risks and uncertainties related to: our limited operating history and history of losses since inception; our ability to increase usage of and reimbursement for our tests; our dependence on a limited number of payers for a significant portion of our revenue; the complexity, time and expense associated with billing and collecting for our test; current and future laws, regulations and judicial decisions applicable to our business, including potential regulation by the FDA or by regulatory bodies outside of the United States; changes in reimbursement for our tests; changes in legislation related to the U.S. healthcare system; our dependence on strategic relationships and collaborations; unanticipated delays in research and development efforts; our ability to develop and commercialize new products, and the timing and expense of commercialization; our ability to successfully enter new product or geographic markets; our ability to conduct clinical studies and the outcomes of such clinical studies; the applicability of clinical results to actual outcomes; trends and challenges in our business; our ability to compete against other companies, products and technologies; our ability to protect our intellectual property; and our ability to obtain capital when needed.report. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to update any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

When used in this report, all references to "Veracyte," the "company," "we," "our" and "us" refer to Veracyte, Inc.

Veracyte, Afirma, Percepta, Envisia, Prosigna, "Know by Design" and the Veracyte, ~~logo~~Afirma, Percepta, Envisia and Prosigna logos are registered trademarks in the ~~Afirma logo are our trademarks.~~U.S. and selected countries. We have common law rights and pending trademark applications for LymphMark and “More About You.” We also refer to trademarks of other corporations or organizations in this report.

This report contains statistical data and estimates that we obtained from industry publications and reports. These publications typically indicate that they have obtained their information from sources they believe to be reliable, but do not guarantee the accuracy and completeness of their information. Some data contained in this report is also based on our internal estimates.

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Overview

We are a ~~leading~~global genomic diagnostics company that ~~is fundamentally improving~~improves patient care by ~~resolving diagnostic uncertainty with evidence that is trustworthy~~answering important clinical questions to inform diagnosis and ~~actionable.~~treatment decisions throughout the patient journey in cancer and other diseases. Our ~~products uniquely combine~~growing menu of genomic ~~technology, clinical~~tests leverage advances in genomic science and ~~machine learning~~technology to ~~provide answers that give physicians and~~change care for patients, ~~a clear path forward without~~enabling them to avoid risky, costly ~~surgery~~procedures and quicken time to appropriate treatment. With Veracyte’s exclusive global access to what we believe is a best-in-class diagnostics instrument platform, we are positioned to deliver our tests to patients worldwide through laboratories and hospitals that ~~is often unnecessary.~~

~~Our vision is~~can perform the tests locally.

We perform our genomic tests for thyroid cancer, lung cancer and interstitial lung diseases, or ILDs, including idiopathic pulmonary fibrosis, or IPF, in our CLIA-certified laboratory in South San Francisco, California. In December 2019, we announced an exclusive global diagnostics license to ~~provide answers that illuminate~~ the ~~pathway to health; and to provide trustworthy and actionable answers that fundamentally improve patient care.~~

~~The role of genomic information in medical practice is evolving rapidly and has affected the diagnosis of disease~~nCounter® Analysis System from NanoString Technologies, as well as ~~treatment decisions. Over~~ the ~~past decade, diagnostic~~acquisition of the Prosigna® breast cancer prognostic gene signature assay, which is commercially available, and the LymphMark™ lymphoma subtyping assay, which is in development. Both tests are designed for use on the nCounter system. We believe this strategic transaction positions us to expand our business globally with a broad menu of advanced genomic tests that ~~analyze~~may be offered as distributed kits and performed in local laboratories worldwide. We believe our current and pipeline products address a collective global market of over $40 billion.

Our genomic material from surgical tissue samples have emerged as an important complement to evaluations performed by pathologists. Information at the genomic level enables one to understand more fully the makeup and specific subtype of diseaseclassifiers are designed to improve ~~diagnosis. In many cases, the genomic information derived from these samples can help guide treatment decisions as part of the standard of care.~~

~~While genomic~~diagnostic and ~~technological advances are fueling the imagination about what is possible in medicine, we remain focused on delivering tests that change clinical decision-making and improve patient outcomes.~~

~~Our deep machine learning methods and rich genomic content improve diagnostic~~prognostic clarity for cancer and other diseases. In its 2015 report, “Improving Diagnostic Errors in Medicine,” the Institute of Medicine concluded that most people will experience at least one diagnostic error in their lifetime, sometimes with devastating consequences. Annually, of the hundreds of thousands of patients who are evaluated for suspected disease in our thyroid and lung indications, ~~traditional~~ diagnosis can be ambiguous in ~~approximately~~ 15-70% of cases. This diagnostic uncertainty can lead to additional, invasive procedures that are often unnecessary, delayed or incorrect treatment, increased healthcare costs and patient anxiety.

We design our tests to improve patient care and outcomes, while delivering clinical and economic utility to physicians, payers and the healthcare system in general. We also position our tests to fit into the way physicians currently evaluate patients ~~undergoing diagnostic evaluation.~~

~~Since~~in order to facilitate adoption.

We develop our ~~founding in 2008, we have commercialized three~~ genomic tests using advanced scientific methods, such as RNA whole-transcriptome sequencing and machine learning, and then optimize the assay and classifier results for the platform on which the test will be performed. Historically, that platform utilized RNA sequencing methods and been performed in our CLIA lab. Beginning in 2021, we expect to adapt our tests for multiplex analysis on the nCounter platform for international distribution of our tests as well.

We believe ~~are transforming diagnostics:~~our powerful scientific platform provides multiple vectors to create value for patients, providers and payers, as well as stockholders, and to help advance precision medicine:

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Unique Biorepositories - When we develop new tests, we build extensive, robust biorepositories of patient-consented samples and well-curated clinical, radiological, outcome and other information from Institutional Review Board-approved clinical trials to inform our discovery efforts. Our biorepositories are designed to encompass the broad spectrum of disease that our tests may encounter when used in clinical practice, as well as the wide range of conditions associated with patients who are suspected of having a particular disease. We extract extensive genomic information from these patient samples using our RNA whole-transcriptome sequencing platform.

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

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High-Performing Commercial Genomic Tests – With the exception of Prosigna, which competes with a first-to-market test in a highly competitive environment, our genomic tests generally serve large, untapped markets where they are changing the diagnostic and treatment paradigm for patients. We believe the nCounter platform affords us the opportunity to adapt our test menu for multiple markets globally, providing flexibility for a global distributed testing model and potentially increased efficiency in our United States-based CLIA lab. Regardless of the testing platform used for diagnosis, our RNA sequencing platform enables us to offer testing from our CLIA lab for a broad range of gene alterations, which can inform treatment decisions at the time of diagnosis.

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We believe our ability to leverage RNA whole-transcriptome sequencing data in large biorepositories of patient-consented samples in oncology and other indications presents an opportunity for biopharmaceutical companies to enhance their research and development capabilities. In April 2018, we announced a collaboration with Loxo Oncology (now a wholly owned subsidiary of Eli Lilly and Company) to advance its development of highly selective medicines for patients with genetically defined cancers, including thyroid cancer. In December 2018, we entered into a long-term strategic collaboration with Johnson & Johnson Innovation and the ~~Afirma Gene Expression Classifier, or GEC,~~Lung Cancer Initiative at Johnson & Johnson to advance the development and commercialization of novel diagnostic tests to detect lung cancer at its ~~next-generation test,~~earliest stages, when the ~~Afirma Genomic Sequencing Classifier, or GSC, to determine whether thyroid nodules previously classified by cytopathology as indeterminate~~disease is most treatable. The collaboration builds upon foundational "field of injury" science whereby genomic changes associated with lung cancer can be ~~reclassified as benign;~~identified with a simple brushing of a person's airway to develop new interventions that can save lives. Additionally, in January 2020, we announced an agreement with Acerta Pharma, the hematology research and development arm of AstraZeneca, to provide genomic information that will support its development of oncology therapeutics in lymphoma.

Our collaboration with the Lung Cancer Initiative at Johnson & Johnson has helped accelerate two of our key lung cancer programs: (i) commercialization of the Percepta ~~Bronchial Genomic Classifier to improve~~GSC on our RNA whole-transcriptome sequencing platform, and (ii) development of the first non-invasive nasal swab test for early lung cancer ~~screening~~diagnosis. We began making the Percepta GSC available to customers in June 2019. In October 2019, we announced preliminary data for our nasal swab classifier, which demonstrated the test’s potential to identify patients at low risk of lung cancer so they can potentially avoid unnecessary procedures and ~~diagnosis;~~those at high risk so they can receive prompt diagnosis and the Envisia Genomic Classifier to improve the physician's ability to differentiate idiopathic pulmonary fibrosis, or IPF, from other interstitial lung diseases, or ILD. Collectively, we believe these tests address a $2 billion global market opportunity.

Patients typically access our tests through their physician during the diagnostic process. All of our testing services are made available through our clinical reference laboratories located in South San Francisco, California and Austin, Texas, which are each certified under the Clinical Laboratory Improvement Amendments of 1988, or CLIA.

treatment.

The published evidence supporting our tests demonstrates the robustness of our science and clinical ~~studies.~~studies, which we believe is key to driving adoption and reimbursement. Patients and physicians can access our full list of publications on our website. Over 3050 clinical studies covering our products have been published, including ~~two~~three landmark clinical validation papers published in The New England Journal of Medicine. for the Afirma and Percepta classifiers, respectively, and in The Lancet Respiratory Medicine for the Envisia classifier. We continue to build upon our extensive library of clinical evidence. We also expect to continue expanding our offerings in thyroid cancer, lung cancer and interstitial lung diseases such as IPF as well as other cancer indications that we believe will benefit from our technology and approach.

We believe our focus on developing clinically useful tests that change patient care is enabling us to set new standards in genomic test reimbursement. Our ~~flagship product,~~genomic classifiers in thyroid cancer, lung cancer and IPF, as well as the Prosigna breast cancer assay are covered by Medicare. Our Afirma classifier, ~~is now covered for more than 270 million people in the U.S.~~ for use in thyroid cancer diagnosis, is now covered by every major health plan in the United States, which collectively insure more than 275 million people. We are contracted as an in-network service provider to health plans representing over 225 million people in the United States. We believe that our in-network status with private payers will help facilitate private insurer reimbursement for our Percepta and Envisia classifiers. The Prosigna test is covered by leading private payers in the United States and is widely reimbursed by government and private payers in the countries where it is available.

We also expect to continue expanding our offerings in thyroid cancer, lung cancer, ILDs such as IPF, breast cancer and lymphoma, as well as other indications that we believe will benefit from our technology and approach. Our product development pipelines address what we believe to be significant market opportunities for addressing clinical questions in early detection, diagnosis, staging/prognosis, therapy selection/surgery and disease monitoring across the aforementioned indications. We plan to commercially introduce four products in 2021: Our nasal swab classifier for early lung cancer diagnosis and our ~~second commercial product,~~Percepta Atlas, which, together with the Percepta ~~classifier, is the first genomic test to gain Medicare coverage for improved~~GSC, form a comprehensive lung cancer ~~screening~~portfolio that we believe is poised to disrupt lung cancer diagnosis; our Envisia classifier on the nCounter system for expansion into global markets; and, ~~diagnosis.~~if the FDA grants our De Novo classification request, our LymphMark lymphoma subtyping test.

Additionally, since the beginning of the second quarter of 2020 we announced our first two diagnostic company partnerships – with CareDx in transplantation and MAVIDx in COVID-19 and other infectious diseases – which we expect to help expand our testing menu on the nCounter system and fuel additional revenue-generation opportunities.

Impact of COVID-19

In December 2019, a strain of coronavirus was reported in Wuhan, China, and began to spread globally, including to the United States and Europe, in the following months. The World Health Organization has declared COVID-19 to be a pandemic and a public health emergency of international concern. The full impact of the COVID-19 outbreak is inherently uncertain at the time of this report. The COVID-19 outbreak has resulted in travel restrictions and in some cases, prohibitions of non-essential activities, disruption and shutdown of businesses and greater uncertainty in global financial markets. As COVID-19 has spread, it has significantly impacted the health and economic environment around the world and many governments have closed most public establishments, including restaurants, workplaces and schools. Our customers, third-party contract manufacturers, suppliers and collaboration partners may be affected by the closure of hospitals, doctors' offices, manufacturing sites, or country borders, among other measures being put in place around the world. Consequent increases in layoffs and furloughs in the medical industry and otherwise during the shutdown are having, and will continue to have, negative impact on the demand for medical care and diagnostic tests, which affects the frequency with which tests are prescribed, and the ability of doctors and hospitals to administer such tests. Further the inability to travel and conduct face-to-face meetings can also make it more difficult to expand utilization of our products into new geographies and to drive awareness of our products. These circumstances have had a significant negative impact on our financial results during 2020.

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~~Third Quarter 2017 Financial Results~~

During the second half of March 2020, we experienced a significant decline in the volume of samples received. Our monthly reported genomic volumes reached a year-to-date low point in April 2020. Following the April 2020 low point, sequential monthly total reported genomic volume increased in both May and June 2020. As a result of the impact on our volumes, we reported a significant decline in sequential and year-over-year revenue for the quarter ended June 30, 2020. For the ~~three-month period~~quarter ended September 30, ~~2017, as compared~~2020, our total reported genomic volume, relative to ~~the three-month period ended September 30, 2016:~~

~~Revenue was $17.5 million, a decline of 6%. Revenue accrued for tests performed in the current year quarter increased 24%, offset by the impact of higher cash collections in~~ the prior year quarter, increased 3% as hospitals started performing more non-emergency procedures and physician practices began to reopen. The COVID-19 pandemic has also caused us to modify our business practices, including taking proactive steps to protect our employees and the broader community (including but not limited to curtailing or modifying employee travel, moving to full remote work wherever possible, and cancelling physical participation in meetings, events and conferences), while ensuring our ability to deliver genomic test results to physicians and their patients who need them. Given the significant challenges we face from COVID-19, we have taken actions to reduce expenses and preserve the health of our business, including our board of directors, executive team, including our Chairman and CEO, and certain other employees taking a reduction in pay, which ended in October 2020. In April 2020, we also put approximately 60 employees on a temporary furlough, which ended in July 2020.

During the second quarter of 2020, with limited physical access to physicians, we expanded our use of digital tools to engage with our customers. Given the effectiveness of these programs, we believe such new sales and marketing models offer an opportunity to increase our efficiency and align with our projections for a U-shaped recovery. To that end, in July 2020 we terminated over 30 sales positions, representing a combination of employees who were furloughed and those who were not. At the same time, we brought the remaining 35 employees – mostly in sales – back from furlough as our business began to increase. We may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

According to Johns Hopkins Coronavirus Resource Center, daily COVID-19 test volume has increased from less than approximately 0.2 million tests ~~performed prior~~per day in April 2020 to ~~July 1, 2016;~~

~~Genomic Test Volume was 6,533, an~~between 0.8 million and 1.0 million tests per day in the first half of October 2020. We believe the rapid increase in daily testing volumes is consuming reagents and supplies otherwise available to genomic testing companies like ours across the United States. In October, we experienced supply chain disruptions in the supply of ~~14%;~~

~~Operating Expenses were $23.9 million, an increase of 2%;~~

~~Net Loss and Comprehensive Loss was $7.0 million, an increase of 25%;~~

~~Net Loss Per Common Share was $0.21 compared to $0.20;~~

~~Cash Burn, defined as net cash~~plastic materials used in ~~operating activities~~the processing of samples. When not limited by the expiration date of products and ~~net capital expenditures, was $5.8 million, an improvement~~when we feel it reasonable and feasible to do so, we are taking steps to increase our level of ~~23%; and~~

~~Cash and Cash Equivalents was $41.2 million at September 30, 2017.~~

~~Year-to-Date 2017 Financial Results~~

~~For the nine-month period ended September 30, 2017, as compared~~stock reserves, to ~~the nine-month period ended September 30, 2016:~~

~~Revenue was $52.4 million, an increase~~develop alternative sources of ~~12%;~~

~~Genomic Test Volume was 18,873, an increase of 12%;~~

~~Operating Expenses were $72.9 million, an increase of 1%;~~

~~Net Loss and Comprehensive Loss was $22.6 million, an improvement of 16%;~~

~~Net Loss Per Common Share was $0.67, an improvement of 31% from $0.97; and~~

~~Cash Burn was $19.1 million, an improvement of 31%.~~

~~Subsequent Events~~

In November 2017, the Company closed a $35.0 million senior secured credit facility, consisting of a $25.0 million term loan and a $10.0 million asset-based revolving line of credit to refinance its existing $25.0 million credit facility, reducing the current variable interest rate by over 50% and providing additional liquidity through a new revolving line of credit. The Company paid a $1.5 million exit fee at the close to its prior lender; and

~~In October 2017, the Company amended and restated its Thyroid Cytopathology Partners (TCP) agreement. In return for lower fees, the Company agreed to extend the term for five years~~supply and to ~~pay $1.75 million~~implement procedures to ~~Pathology Resource Consultants, TCP’s previous management company, over eight quarters. Based~~mitigate the impact on ~~current~~our supply chain or our ability to process samples in our laboratories. Though we are in regular contact with our key suppliers, we do not have, nor expect to have, the necessary insight into our vendors’ supply chain issues that we may need to know to effectively mitigate the impact to our business. Though we attempt to mitigate the impact to our business, these interruptions in manufacturing (including the sourcing of reagents or supplies) may negatively impact our test volumes or levels of revenue.

The extent of the ~~Company believes~~impact of the ~~amendment~~COVID-19 on our future liquidity and operational performance will ~~be immediately accretive~~depend on certain developments, including the duration and spread of the outbreak, the impact on our customers' operations and the impact to ~~earnings as well as cash burn.~~

our sales and renewal cycles.

Third Quarter ~~2017 and Recent Business Highlights~~

~~Commercial Achievements:~~

~~Gained 100 new accounts for our next-generation Afirma GSC and continued to transition existing accounts;~~

~~Grew genomic test volume by 14% in~~2020 Financial Results

For the third quarter of ~~2017, compared to~~2020:

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Total Revenue was $31.1 million, comprising $30.3 million in testing and product revenue and $0.8 million in biopharmaceutical partnership revenue;

•

Gross Margin was 67%;

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Operating Expenses, Excluding Cost of Revenue, were $24.8 million;

•

Net Loss and Comprehensive Loss was $4.1 million;

•

Basic and Diluted Net Loss Per Common Share was $0.08;

•

Net Cash Provided by Operating Activities was $1.8 million; and

•

Cash and Cash Equivalents were $345.1 million at September 30, 2020.

For the nine-months ended September 30, 2020:

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Total revenue was $82.9 million, comprising $77.6 million in testing and product revenue and $5.3 million in biopharmaceutical partnership revenue;

•

Gross Margin was 64%;

•

Operating Expenses, Excluding Cost of Revenue, were $80.0 million;

•

Net Loss and Comprehensive Loss was $26.9 million;

•

Basic and Diluted Net Loss Per Common Share was $0.52; and

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Net Cash Used in Operating Activities was $12.0 million.

Third Quarter 2020 and Recent Business Highlights

Commercial Growth and Reimbursement Expansion:

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Grew reported genomic testing volume (Afirma, Percepta and Envisia) to 10,242, an increase of 90% over the second quarter of 2020 and 3% over the third quarter of 2019.

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Generated $7.0 million in year-to-date 2020 revenue from our Prosigna breast cancer test, achieving our pre-pandemic, full-year 2020 revenue goal.

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Received Advanced Diagnostic Laboratory Test (ADLT) status and new Medicare pricing for the Envisia classifier, beginning October 1, 2020, positioning the test for expanded revenue growth.

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Received new CPT codes and preliminary national Medicare pricing for the Afirma Medullary Thyroid Carcinoma (MTC) classifier and the Xpression Atlas, providing a pathway for increased reimbursement.

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Obtained coverage for the Prosigna breast cancer test from the Federal Joint Committee (G-BA) in Germany, our third largest European market.

Evidence Development:

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Prosigna:

		◦	Launched the PROCURE study, led by a distinguished, independent scientific committee of breast cancer experts and including input from 180 clinicians throughout Europe, intended to achieve consensus on the evidence supporting the most frequently used breast cancer genomic tests, including Prosigna.
		◦	Data from the TransATAC study were published in the Journal of Clinical Oncology elucidating the foundational molecular biology on which the Prosigna test is based and its higher likelihood of predicting long-term risk of recurrence among certain groups of women with early-stage breast cancer, compared to other breast cancer genomic tests.

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Afirma:

◦

An independent study published in Cytopathology by UCLA researchers showed that use of the Afirma GSC further reduced unnecessary surgeries in thyroid cancer diagnosis compared to the original Afirma test.

Table of ~~2016;~~

~~Generated our first commercial revenue for the Percepta Bronchial Genomic Classifier and expanded its use to over 70 institutions; and~~

~~Launched the Screen Together awareness campaign with the Lung Cancer Initiative of North Carolina to increase lung cancer screening awareness among high-risk people.~~

~~Reimbursement Progress:~~

Increased contracted lives for the Afirma classifier by 13 million through the execution of five new contracts, including four Blues plans. This brings the total number of contracted lives for the test to 176 million and increases from last quarter the number of contracted Blues lives by 35% to 45 million; and

Received preliminary 2018 Medicare pricing indicating that the Afirma classifier price will increase from $3,220 to $3,600. Pending a public comment period, the final rates are scheduled to begin January 1, 2018, as part of the Protecting Access to Medicare Act of 2014 (PAMA).

~~Clinical Evidence Development:~~

Presented data from five studies (two oral and three poster presentations) highlighting the Afirma GSC’s advances in informing both benign and cancerous subtypes of thyroid nodules at the 87th Annual Meeting of the American Thyroid Association (ATA);

Delivered podium presentation of clinical utility data for the Percepta classifier at the CHEST Annual Meeting. Findings showed that the use of Percepta reduces the number of invasive procedures by 50% in patients whom the test classifies as low-risk for lung cancer following an inconclusive bronchoscopy result; and

~~Received acceptance of an abstract demonstrating clinical utility of the Envisia Genomic Classifier in the diagnosis of idiopathic pulmonary fibrosis for presentation at the PFF Summit in November.~~

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Pulmonology:

		◦	Presented three e-Posters at the American Thoracic Society 2020 Virtual Meeting featuring real-world data that reinforce previous findings suggesting that the Percepta and Envisia classifiers improve the diagnosis of lung cancer and ILDs.
		◦	Published data in the journal CHEST suggesting that the Percepta classifier reduces unnecessary invasive procedures following inconclusive bronchoscopy results for patients with lung nodules and that these results are durable for over one year of follow-up.
		◦	Presented an oral and e-Poster presentation at CHEST Annual Meeting 2020 supporting advancement of our lung cancer nasal swab classifier, along with the potential to integrate radiologic data to further augment genomics in the diagnosis of ILDs, including idiopathic pulmonary fibrosis.

Financing:

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Issued and sold 6,900,000 shares of common stock in August 2020 in a registered public offering, including the underwriters’ exercise in full of their option to purchase an additional 900,000 shares, at a price to the public of $30.00 per share. Net proceeds from the offering were approximately $194 million.

Factors Affecting Our Performance

Impact of COVID-19

The extent of the impact of the COVID-19 outbreak on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers and our sales cycles, employee or industry events, and effect on our vendors, all of which are uncertain and cannot be predicted. The COVID-19 pandemic and its adverse effects have become more prevalent in the locations where we, our customers, suppliers or third-party business partners conduct business and as a result, we have begun to experience more pronounced disruptions in our operations. We may experience constrained supply or curtailed customer demand that could materially adversely impact our business, results of operations and overall financial performance in future periods. Specifically, we may experience impact from changes in how hospital and physicians treat their patients and the frequency of their interaction with their patients, our ability to have in-person meetings with physicians and other customers and drive education and interest in our tests, and difficulties and changes to our sales, logistics, testing, customer support and other processes. As of the filing date of this Form 10-Q, the extent to which COVID-19 may impact our financial condition or results of operations or guidance is uncertain. The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. See Risk Factors for further discussion of the possible impact of the COVID-19 pandemic on our business.

Reported Genomic Test Volume

Our performance depends on the number of genomic tests that we perform and report as completed in our CLIA laboratories. Factors impacting the number of tests that we report as completed include, but are not limited to:

~~the number of samples that we receive that meet the medical indication for each test performed;~~

~~the quantity and quality of the sample received;~~

~~receipt of the necessary documentation, such as physician order and patient consent, required to perform, bill and collect for our tests;~~

~~the patient's ability to pay or provide necessary insurance coverage for the tests performed;~~

~~the time it takes us to perform our tests and report the results;~~

the seasonality inherent in our business, such as the impact of work days per period, timing of industry conferences and the timing of when patient deductibles are exceeded, which also impacts the reimbursement we receive from insurers; and

~~our ability to obtain prior authorization or meet other requirements instituted by payers, benefit managers, or regulators necessary to be paid for our tests.~~

•

the impact of COVID-19 on patients seeking to have tests performed;

•

the number of samples that we receive that meet the medical indication for each test performed;

•

the quantity and quality of the sample received;

•

receipt of the necessary documentation, such as physician order and patient consent, required to perform, bill and collect for our tests;

•

the patient's ability to pay or provide necessary insurance coverage for the tests performed;

•

the time it takes us to perform our tests and report the results;

•

our ability to obtain prior authorization or meet other requirements instituted by payers, benefit managers, or regulators necessary to be paid for our tests.

We generate substantially all our revenue from genomic testing services, including the rendering of a cytopathology diagnosis as part of the Afirma solution. ~~We do not accrue revenue for tests performed and reported that do not meet our accrual criteria.~~ For the Afirma classifier, we do not accrue revenue for approximately 5%~~-10%~~ - 10% of the tests that we perform and report as complete due principally to insufficient RNA from which to render a result and tests performed for which we do not reasonably expect to be paid. ~~For tests that we perform that do not meet our accrual criteria, we recognize revenue upon cash receipt.~~

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 ~~will~~to increase asif more payers make a positive coverage ~~decision~~decisions and as payers enter into contracts with us, which should enhance our ~~accrued~~ revenue and cash collections. To drive increased adoption of ~~Afirma,~~our products, we increased our sales force and marketing efforts over the last several ~~years, along with increasing~~years. Our sales team is structured to sell all of our ~~marketing efforts. We have hired institutional channel managers to focus on the institutional segment, where accounts generally send us fine needle aspirations, or FNAs,~~products; we do not maintain a separate sales force for ~~the Afirma genomic classifier only, and account managers, dedicated to serving existing accounts, thereby freeing up our product specialists to focus on transacting new business.~~each product. If we are unable to expand the base of ~~prescribing~~ordering physicians and penetration within these accounts at an acceptable rate, or if we are not able to execute our strategy for increasing reimbursement, we may not be able to effectively increase our revenue. We expect to continue to see pressure from payers to limit the utilization of tests, generally, and we believe more payers are deploying ~~costs~~cost containment tactics, such as pre-authorization, reduction of the payer portion of reimbursement and employing laboratory benefit managers to reduce utilization rates.

Integrating acquired assets and advances in our collaborations

Revenue growth, operational results and advances in our business strategy depends on our ability to integrate any acquired assets into our existing business. The integration of acquired assets may impact our revenue growth, increase the cost of operations, cause significant write-offs of intangible assets, or may require management resources that otherwise would be available for ongoing development of our existing business. The integration of assets acquired from NanoString in December 2019 may impact our revenue and operating results through integration of a sales force, development of a product supply operation and the expansion of our business internationally with a broad menu of advanced genomic tests that may be offered.

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Revenue growth stemming from our collaborations depends on our ability to deliver services or information and achieve milestones required from our collaborative partners. Our collaboration partners pay us for the provision of data, other services and the achievement of milestones. Under a collaboration with Johnson & Johnson in 2018, we provided data services required under this agreement in 2019 and 2020; however, there remains $9.0 million of revenue associated with development and commercialization milestones yet to be achieved.

How We Recognize Revenue

Testing Revenue

We recognize testing revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers. Most of our revenue is generated from the provision of diagnostic testing services. These services are completed upon the delivery of test results to the prescribing physician, at which time we bill for the services. We recognize revenue related to billings on an accrual basis when we are able to make a reasonable estimate of reimbursement at the time delivery is complete. In the first period in which revenue is accrued for a particular payer or test, there generally is a one-time increase in revenue. Until we have contracts with payers or can reasonably estimate the amount that will ultimately be received, we recognize the related revenuebased on ~~the cash basis. As we commercialize new products, we will need to be able to make a reasonable estimate~~estimates of the amount that will ultimately be ~~received from each~~realized. In determining the amount to accrue for a delivered test, we consider factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer and us, payment as a percentage of the agreed upon rate (if applicable), amount paid per test and any current developments or changes that could impact reimbursement. These estimates require significant judgment by management.

Prior to the adoption of ASC 606, for ~~each new product offering prior to being able to recognize~~our testing services we recognized a portion of our revenue not at the ~~related revenue~~time of delivery of test results, on an ~~accrual basis. Because~~accrual-basis of accounting, but upon the ~~timing and amount~~ultimate payment for those services, on the cash-basis of cash payments received from payers as well as one-time increases in revenue from newly accrued payers are difficult to predict, we expect that our revenue may fluctuate significantly in any given quarter.

~~As of September 30, 2017,~~accounting. Through December 31, 2019, cumulative amounts billed at list price for tests processed which were not recognized as revenue upon delivery of a patient report because our accrual revenue recognition criteria were not met and for which we have not collected cash or written off as uncollectible, totaled approximately ~~$159.5~~$159.3 million.

As Of this amount, we did not collect any amounts in the nine months ended September 30, 2020 and we have no expectation of ~~December 31, 2016, cumulative amounts billed at list price~~future collection because we began accruing for ~~tests processed which were not recognized as~~substantially all revenue upon delivery of a patient report because our accrual revenue recognition criteria were not met and for which we have not collected cash or written off as uncollectible, totaled $161.2 million. Of this amount, we recognized revenue of approximately $0.3 million and $2.2 million in the ~~three~~third quarter of 2016. Under ASC 606, we recognize revenue at the time we deliver test results based upon what we reasonably expect to collect and ~~nine months ended September 30, 2017, respectively, when cash was received.~~

the list price of a test may not be indicative of what we ultimately expect to collect.

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 ~~previously performed but unpaid tests.~~amounts that we estimate are collectible and meet our revenue recognition criteria. Revenue ~~from these tests, if any,~~ 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 ~~claims denials.~~

the amount we expect to ultimately collect. Finally, when we increase our list price, ~~as we did in July 2015,~~ it will increase the cumulative amounts ~~billed.~~billed but may not positively impact accrued revenue. In addition, payer contracts generally include the right of offset and payers may offset payments prior to resolving disputes over tests performed.

Generally, we calculate the average ~~Afirma genomic classifier~~ reimbursement for our products from all payers, ~~whether they are on the cash or an accrual basis,~~ for tests that are on average a year old, since it can take a significant period of time to collect from some payers. Except in situations where we believe the rate we reasonably expect to collect ~~varies~~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 ~~Afirma genomic classifier~~product represents the total cash collected to date against ~~Afirma~~ genomic classifier tests, including variants, performed during the relevant period divided by the number of these tests performed during that same period.

The average Afirma genomic classifier reimbursement rate 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. For the ~~quarter~~three months ended September 30, ~~2017,~~2020, we accrued, on average, ~~we accrued~~ between ~~$2,400~~$2,800 and ~~$2,500~~$2,900 for the Afirma genomic classifier tests, including variants, that met our revenue recognition standard, which was between 90% - 95% of the reported Afirma classifier test volume.

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From the third quarter of ~~2016~~2019 to the third quarter of ~~2017,~~2020, we accrued between ~~$1.7~~$1.0 million and ~~$2.2~~$2.4 million in revenue per quarter from providing cytopathology services associated with our Afirma solution.

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. ~~Accordingly, any~~

Product Revenue

We began recognizing product revenue ~~that~~in December 2019 when we ~~recognize as a result of cash collection in respect of previously performed but unpaid tests will favorably impact our liquidity~~executed an agreement with NanoString for the exclusive worldwide license to the nCounter platform and ~~results of operations in future periods.~~

~~Development of Additional Products~~

We currently rely on sales of Afirma to generate most of our revenue. In May 2014, we commercially launched our Afirma Malignancy Classifiers, which we believe enhances our Afirma Thyroid FNA Analysis as a comprehensive way to manage thyroid nodule patients and serve our current base of prescribing physicians. We are also pursuing development orthe acquisition of products for ~~additional diseases~~in vitro diagnostic use.

We recognize product revenue when control of the promised goods is transferred to ~~increase~~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 ~~diversify~~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.

Our products consist of the Prosigna breast cancer assay, the nCounter Analysis System and related diagnostic kits. Revenues are presented net of the taxes that are collected from customers and remitted to governmental authorities.

Biopharmaceutical and Collaboration Revenues

From time to time, we enter into arrangements to license or provide access to our assets or services, including testing services, clinical and medical services, research and development and other services. Such arrangements may require us to deliver various rights, data, services, access and/or testing services to partner biopharmaceutical companies. The underlying terms of these arrangements generally provide for consideration paid to us in the form of nonrefundable fees, performance milestone payments, expense reimbursements and possibly royalty and/or other payments.

The terms of our collaborative arrangements typically include one or more of the following: (i) up-front fees; (ii) milestone payments related to the achievement of development, regulatory, or commercial goals; and (iii) royalties on net sales of licensed products. Each of these payments may result in collaboration revenues or an offset against research and development expense.

Arrangements with partners may fall under the scope of ASC Topic 808, Collaborative Arrangements, or ASC 808. While these arrangements are in the scope of ASC 808, we may analogize to ASC 606 for some aspects of these arrangements. We analogize to ASC 606 for certain activities within the collaborative arrangement for the delivery to a customer of a good or service (i.e., a unit of account) that is part of our ongoing major or central operations.

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

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

Net sales of data or other services to our customers are classified under biopharmaceutical revenue, and all other non-customer revenue are classified under collaboration revenue in our condensed consolidated statements of operations and comprehensive loss. Payments made to us that are not net sales of data or other services to our customers are recorded as an offset against research and development expense in our condensed consolidated statements of operations and comprehensive loss.

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Development of Additional Tests

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

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

We launched the ~~Percepta classifier~~original Afirma XA in March 2018. We subsequently introduced an expanded Afirma XA in April ~~2015. Additionally,~~2020 to provide physicians with additional gene alteration content – including novel or rare NTRK, ALK, RET and BRAF fusions – to further inform surgery and treatment decisions for patients with suspected or confirmed thyroid cancer. Compared to the original gene alteration panel, the expanded Afirma XA now reports 905 DNA variants (versus 761) and 235 RNA fusion partners (versus 130) in 593 genes (versus 511).

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

We have also expanded our ability to answer important clinical questions that improve patient care in pulmonology. Our Percepta Bronchial Genomic Classifier, introduced in April 2015, was the first genomic test to receive Medicare coverage for use in lung cancer diagnosis, where it improves the performance of diagnostic bronchoscopy. The test deploys novel “field of injury” technology that enables genomic changes associated with lung cancer to be detected in samples taken from the main bronchial airway during a bronchoscopy. In June 2019, we introduced ~~in October 2016 a solution~~our “next-generation” Percepta Genomic Sequencing Classifier, providing physicians with expanded lung cancer risk information that can further guide next steps for ~~diagnosing interstitial~~patients with suspicious lung ~~disease,~~nodules, as compared to the original Percepta classifier.

Additionally, our Envisia Genomic Classifier, launched in October 2016, is the first commercial test to improve the diagnosis of IPF among patients with a suspected interstitial lung disease. The Envisia test is also covered for Medicare patients.

We are currently leveraging the same “field of injury” technology that ~~will offer an alternative~~powers our Percepta classifier to ~~surgery~~develop a first-of-its-kind, noninvasive nasal swab test that can enable earlier lung cancer diagnosis and ultimately, we believe, help reduce lung cancer deaths. In October 2019, we announced preliminary clinical data for our nasal swab classifier showing that the novel genomic test could identify with a high degree of accuracy patients whose lung nodules were high risk for cancer, so they could obtain prompt diagnosis and potential treatment, and patients with low risk of cancer so they could be monitored noninvasively. We are also developing the Percepta Atlas, which – similar to the Afirma XA – is intended to inform treatment decisions by ~~developing a genomic signature to classify~~detecting gene alterations in small samples collected ~~through less invasive bronchoscopy techniques.~~at the time of diagnosis. We ~~expect~~plan to ~~continue~~introduce the nasal swab test and the Percepta Atlas in 2021, rounding out our comprehensive lung cancer portfolio designed to ~~invest heavily in research and development in order to expand~~answer important clinical questions throughout the capabilities of our solutions and to develop additional products. Our success in developing or acquiring new products will be important in our efforts to grow our business by expanding the potential market for our products and diversifying our sources of revenue.

patient journey.

Timing of Our Research and Development Expenses

We deploy state-of-the-art and costly genomic technologies in our biomarker discovery experiments, and our spending on these technologies may vary substantially from quarter to quarter. We also spend a significant amount to secure clinical samples that can be used in discovery and product development, as well as clinical validation studies. The timing of these research and development activities is difficult to predict, as is the timing of sample acquisitions. If a substantial number of clinical samples are acquired in a given quarter or if a high-cost experiment is conducted in one quarter versus the next, the timing of these expenses can affect our financial results. We conduct clinical studies to validate our new products as well as on-going clinical studies to further the published evidence ~~to support~~that supports 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.

~~Impact~~

Table of ~~Genzyme Co-promotion Agreement~~Contents

From January 2012 through September 9, 2016, we were party to a Co-Promotion Agreement with Genzyme to market the Afirma solution in the United States. The agreement required that we pay a certain percentage of our cash receipts from the sale of the Afirma solution to Genzyme, which percentage decreased over time. We received a $10.0 million upfront co-promotion fee from Genzyme under the Co-Promotion Agreement, which we deferred and amortized over the life of the agreement until the agreement was terminated effective September 9, 2016. The final payments totaling $4.0 million under the Agreement were made in September 2016.

Under the ex-U.S. agreement with Genzyme, we agreed to pay Genzyme 25% of net revenue from the sale of the Afirma solution in Brazil and Singapore over a five-year period commencing January 1, 2015. Effective July 6, 2017, the agreement was terminated and payments made under this agreement for the nine months ended September 30, 2017 were not material.

Financial Overview

Revenue

Through September 30, ~~2017,~~2020, we had derived most of our revenue from the sale of ~~Afirma. To date, we offer~~ 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 September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Medicare 26 % 23 % 26 % 27 %
UnitedHealthcare 14 % 11 % 14 % 12 %
40 % 34 % 40 % 39 %

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Medicare		25	%		26	%		24	%		24	%
Johnson and Johnson Services, Inc.		*			13	%		*			12	%
UnitedHealthcare		11	%		11	%		11	%		11	%
		36	%		50	%		35	%		47	%
*Less than 10%

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. ~~We determine~~In determining the amount to accrue for a delivered test, we ~~expect to ultimately receive based on~~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 ~~payer, per contract~~test and any current development or ~~agreement basis.~~changes that could impact reimbursement. Upon ultimate collection, the amount received ~~where reimbursement was estimated~~ is compared to previous estimates and the amount accrued is adjusted accordingly. ~~In other situations, where we cannot reasonably estimate the amount that will be ultimately received, we recognize revenue on the cash basis.~~ 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 ~~we recognize revenue on an accrual basis and later determine~~ the judgments underlying our estimated reimbursement change, our accrued revenue and financial results could be negatively impacted in future ~~quarters.~~

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 revenue as a percentage of revenue may vary significantly from period to period because we domay not recognize all revenue in the period in which the associated costs are incurred. We expect cost of 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 revenue will be high and will increase disproportionately our aggregate cost of revenue until we achieve efficiencies in processing these new tests. We are currently commercializing the Afirma GSC, Percepta and Envisia tests, andas 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 revenue until we achieve efficiencies in processing these new tests.

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

Our cost of biopharmaceutical revenue are the costs of performing activities under arrangements that require us to perform research and development services on behalf of a customer pursuant to a biopharmaceutical service agreement, and is mainly comprised of compensation expense and pass through costs.

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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.~~products and pipeline. These expenses consist of compensation expenses, direct research and development expenses such as prototype materials, laboratory supplies and costs associated with setting up 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 research and development expenses in 2016 for the development and launch of Envisia and for the continued development and support of the Afirma and Percepta tests. For the remainder of 2017, we expect to incur research and development expenses on ongoing evidence development for our Afirma, Percepta and Envisia ~~classifiers.~~

classifiers in 2019. We incurred a majority of our research and development expenses in the nine months ended September 30, 2020 in support of our pipeline products, and expect this to continue in the remainder of 2020 and beyond.

Selling and Marketing

Selling and marketing expenses consist of compensation expenses, direct marketing expenses, professional fees, other expenses such as travel and communications costs and allocation of facility and information technology expenses. In addition, co-promotion fees paid to Genzyme, net of amortization of the upfront fee received, are included in selling and marketing expenses through the September 9, 2016 termination date of our U.S. co-promotion agreement. We have expanded our internal sales force as we invest in our multi-product sales strategy to assign a single point of contact to successfully develop and implement relationships with our customers and increased our marketing ~~spending as we transitioned out of the Genzyme relationship, with these costs offset by the elimination of the co-promotion fee.~~spending. We have also incurred increased selling and marketing expense as a result of investments in our lung product portfolio and believe total selling and marketing expenses will continue to increase as we launch and promote our new tests.

General and Administrative

General and administrative expenses include compensation expenses for executive officers and administrative, billing and client service personnel, professional fees for legal and audit services, occupancy costs, depreciation and amortization, and other expenses such as information technology and miscellaneous expenses offset by allocation of facility and information technology expenses to other functions. For the nine months ended September 30, ~~2017,~~2020, approximately ~~61%~~64% of the average headcount classified as general and administrative encompass our billing and customer care teams. We expect general and administrative expenses to continue to increase as we build our general and administration infrastructure and to stabilize thereafter.

Intangible Asset Amortization

~~Intangible asset amortization began in April 2015 when we launched the Percepta test. The~~

Our finite-lived intangible ~~asset with a cost of $16.0 million is~~assets, acquired in business combinations, are being amortized over 5 to 15 years, using the straight-line method.

Amortization expense is expected to be approximately $5.1 million per year through 2024 and decrease thereafter.

Interest Expense

Interest expense is attributable to our borrowings under ~~our credit agreement~~debt agreements and capital leases as well as costs associated with the ~~loan and security agreement that it replaced.~~

prepayment of debt.

Other Income, ~~(Expense),~~ Net

Other income, ~~(expense),~~ net consists primarily of sublease rental income and interest income ~~received from payers and~~ from our cash ~~equivalents.~~held in interest bearing accounts.

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Results of Operations

~~Comparison of the Three and Nine Months Ended September 30, 2017 and 2016 (In Thousands of Dollars, Except Percentages and Genomic Classifiers Results Reported)~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 Change % 2017 2016 Change %
Revenue $ 17,519
$ 18,603
$ (1,084 ) (6)% $ 52,357
$ 46,828
$ 5,529
12%
Operating expense:

Cost of revenue 7,169
6,367
802
13% 20,426
18,947
1,479
8%
Research and development 3,046
4,006
(960 ) (24)% 10,679
11,734
(1,055 ) (9)%
Selling and marketing 7,885
7,087
798
11% 23,215
22,416
799
4%
General and administrative 5,520
5,763
(243 ) (4)% 17,731
18,062
(331 ) (2)%
Intangible asset amortization 267
266
1
—% 800
800
—
—%
Total operating expenses 23,887
23,489
398
2% 72,851
71,959
892
1%
Loss from operations (6,368 ) (4,886 ) (1,482 ) 30% (20,494 ) (25,131 ) 4,637
(18)%
Interest expense (815 ) (799 ) (16 ) 2% (2,423 ) (1,951 ) (472 ) 24%
Other income (expense), net 134
48
86
179% 353
127
226
178%
Net loss and comprehensive loss $ (7,049 ) $ (5,637 ) $ (1,412 ) 25% $ (22,564 ) $ (26,955 ) $ 4,391
(16)%
Other Operating Data:

Genomic classifiers reported 6,533
5,740
793
14% 18,873
16,924
1,949
12%

We incurred a net loss of $7.0 million and $22.6 million for the three and nine months ended September 30, 2017 compared to a net loss of $5.6 million and $27.0 million in the same periods in 2016. As of September 30, 2017, we had an accumulated deficit of $202.6 million.

~~Revenue~~

~~Revenue recognized on the accrual basis and cash basis for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands of dollars):~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 Change % 2017 2016 Change %
Revenue recognized on the accrual basis $ 17,257
$ 13,903
$ 3,354
24 % $ 50,007
$ 31,478
$ 18,529
59 %
Revenue recognized on the cash basis 262
4,700
(4,438 ) (94 )% 2,350
15,350
(13,000 ) (85 )%
Total $ 17,519
$ 18,603
$ (1,084 ) (6 )% $ 52,357
$ 46,828
$ 5,529
12 %

Revenue decreased $1.1 million, or 6%, for the three months ended September 30, 2017 compared to the same period in 2016. Revenue recognized on the accrual basis increased $3.4 million, or 24%, for the three months ended September 30, 2017 compared to the same period in 2016, primarily due to an increase in accrued genomic classifiers revenue of $3.5 million to $15.2 million for the three months ended September 30, 2017 compared to $11.7 million for the same period in 2016. The increase in accrued genomic classifiers revenue is due to a volume increase of 16% of accrued tests from increased adoption of Afirma and an average accrual rate increase of 12% from higher historical payer collections resulting from more coverage and contracts with payers. Commencing from the quarter ended September 30, 2016, we had sufficient information developed to support reasonable estimates of the amount of revenue to accrue upon test delivery for a number of payers that had been previously recognized on the cash basis and as a result, we accrued revenue for substantially all of our test volume. The cash basis revenue for unaccrued tests delivered prior to July 1, 2016 decreased $4.4 million, or 94%, for the three months ended September 30, 2017 as compared to the same period in 2016.

Revenue increased $5.5 million, or 12%, for the nine months ended September 30, 2017 compared to the same period in 2016. Revenue recognized on the accrual basis increased $18.5 million, or 59%, for the nine months ended September 30, 2017 compared to the same period in 2016, due to increased adoption of Afirma and, increases in the accrual rates for Afirma from higher historical reimbursement from payers. Commencing from the quarter ended September 30, 2016, we had sufficient information developed to support reasonable estimates of the amount of revenue to accrue upon test delivery for a number of payers that had been previously recognized on the cash basis and as a result, we accrued revenue for substantially all of our test volume. The cash basis revenue for unaccrued tests delivered prior to July 1, 2016 decreased $13.0 million, or 85%, for the nine months ended September 30, 2017 as compared to the same period in 2016.

~~Cost of revenue~~

Comparison of the three and nine months ended September 30, ~~2017~~2020 and ~~2016 was as follows~~2019 (in thousands of dollars, except ~~percentages)~~percentages and genomic classifiers reported):

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 Change % 2017 2016 Change %
Cost of revenue:

Laboratory costs $ 3,686
$ 3,152
$ 534
17% $ 10,295
$ 9,560
$ 735
8%
Sample collection costs 869
824
45
5% 2,542
2,617
(75 ) (3)%
Compensation expense 958
792
166
21% 2,773
2,361
412
17%
License fees and royalties 665
796
(131 ) (16)% 2,176
1,980
196
10%
Depreciation and amortization 201
122
79
65% 452
403
49
12%
Other expenses 335
239
96
40% 871
717
154
21%
Allocations 455
442
13
3% 1,317
1,309
8
1%
Total $ 7,169
$ 6,367
$ 802
13% $ 20,426
$ 18,947
$ 1,479
8%

~~Cost of revenue~~

	Three Months Ended September 30,										Nine Months Ended September 30,
	2020			2019			Change			%	2020			2019			Change			%
Revenue:
Testing revenue	$	28,270		$	26,723		$	1,547		6%	$	70,473		$	78,798		$	(8,325	)	(11)%
Product revenue		2,027			—			2,027		NM		7,149			—			7,149		NM
Biopharmaceutical revenue		824			2,250			(1,426	)	(63)%		5,325			7,840			(2,515	)	(32)%
Collaboration revenue		—			2,000			(2,000	)	(100)%		—			4,000			(4,000	)	(100)%
Total revenue		31,121			30,973			148		0%		82,947			90,638			(7,691	)	(8)%
Operating expense:
Cost of testing revenue		9,118			9,114			4		0%		26,157			26,404			(247	)	(1)%
Cost of product revenue		1,048			—			1,048		NM		3,539			—			3,539		NM
Cost of biopharmaceutical revenue		204			—			204		NM		572			—			572		NM
Research and development		4,042			3,643			399		11%		12,618			10,408			2,210		21%
Selling and marketing		10,955			13,088			(2,133	)	(16)%		39,240			39,508			(268	)	(1)%
General and administrative		8,546			6,624			1,922		29%		24,316			20,448			3,868		19%
Intangible asset amortization		1,274			267			1,007		377%		3,822			800			3,022		378%
Total operating expenses		35,187			32,736			2,451		7%		110,264			97,568			12,696		13%
Loss from operations		(4,066	)		(1,763	)		(2,303	)	131%		(27,317	)		(6,930	)		(20,387	)	294%
Interest expense		(55	)		(58	)		3		(5)%		(175	)		(596	)		421		(71)%
Other income (loss), net		(3	)		1,091			(1,094	)	(100)%		627			2,385			(1,758	)	(74)%
Net loss and comprehensive loss	$	(4,124	)	$	(730	)	$	(3,394	)	465%	$	(26,865	)	$	(5,141	)	$	(21,724	)	423%
Other Operating Data:
Genomic classifiers reported		10,242			9,941			301		3%		26,180			28,766			(2,586	)	(9)%
Depreciation and amortization expense		1,990			967			1,023		106%		5,919			2,836			3,083		109%
Stock-based compensation expense		3,090			2,640			450		17%		9,354			6,965			2,389		34%

Revenue

Revenue increased ~~$802,000, or 13%,~~$0.1 million for the three months ended September 30, ~~2017~~2020 compared to the same period in ~~2016. Given our corporate focus on Afirma genomic classifier growth, Afirma classifier tests increased by 13%, offsetting~~2019. This was primarily due to a ~~7% decrease in cytopathology tests. The~~$1.5 million increase in ~~laboratory costs is~~testing revenue from a 3% increase in our Afirma, Percepta, and Envisia genomic classifiers and $2.0 million of sales of Prosigna, a product that we acquired the rights to from NanoString in December 2019. We also make adjustments, as necessary, for testing revenue accrued in prior periods as collections are made if the amount we expect to collect changes. The adjustment for testing revenue accrued in prior periods increased revenue by $0.3 million and $0.1 million for the three months ended September 30, 2020 and 2019, respectively, a net increase of $0.2 million between the periods. Biopharmaceutical revenue decreased $1.4 million and primarily consisted of $0.3 million for the provision of data and $0.3 million for development services for the three months ended September 30, 2020 whereas biopharmaceutical revenue consisted primarily of $2.0 million for the provision of data for the three months ended September 30, 2019. Collaboration revenue in the three months ended September 30, 2019 was derived from the fulfillment of development milestones.

During the second half of March 2020, we began to experience a significant decline in the volume of samples received due to ~~increased Afirma classifier test volume and costs associated with the next generation Afirma GSC, partially offset by~~COVID-19, resulting in a ~~decrease~~significant decline in cytopathology fees related to a decrease in FNA samples processed. The increase in compensation expense is associated with the mix shift to relatively more Afirma classifier versus cytopathology tests, as more labor hours are incurred on Afirma classifier tests compared to cytopathology tests and at a higher average employee cost, as well as an average laboratory headcount increase of 15%. The decrease in license fees and royalties is due to lower revenue and the shift to the Afirma GSC that does not incur a separate license fee.

~~Cost of revenue increased $1.5~~revenue. Revenue decreased $7.7 million, or 8%, for the nine months ended September 30, ~~2017~~2020 compared to the same period in ~~2016. Given our corporate focus on Afirma genomic classifier growth, Afirma classifier tests increased by 11%, offsetting a 6%~~2019. This was primarily due to an $8.3 million decrease in ~~cytopathology tests. The increase~~testing revenue from a 9% decrease in ~~laboratory costs is due to increased~~our Afirma, ~~classifier test volume~~Percepta, and ~~costs associated with the next generation Afirma GSC,~~Envisia genomic classifiers reported, partially offset by $7.1 million of sales of Prosigna. We also make adjustments, as necessary, for testing revenue accrued in prior periods as collections are made if the amount we expect to collect changes. The adjustment for testing revenue accrued in prior periods increased revenue by $1.2 million and $0.8 million for the nine months ended September 30, 2020 and 2019, respectively, a decrease in cytopathology fees related to a decrease in FNA samples processed. The increase in compensation expense is associated with the mix shift to relatively more Afirma classifier versus cytopathology tests, as more labor hours are incurred on Afirma classifier tests compared to cytopathology tests and at a higher average employee cost, as well as an average laboratory headcountnet increase of ~~14%. The increase in license fees and royalties is due to higher revenue. The increase in other expenses is~~$0.4 million between the periods. Biopharmaceutical revenue decreased $2.5 million, primarily due to ~~equipment maintenance costs~~$7.0 million for the provision of data for the nine months ended September 30, 2019 whereas biopharmaceutical revenue primarily consisted of $1.5 million for the provision of data, $1.0 million for the sale of commercial and ~~laboratory supplies.~~

~~Research~~development rights to CareDx, $1.0 million of milestones and $0.7 million for development services for the nine months ended September 30, 2020. Collaboration revenue in the nine months ended September 30, 2019 was derived from the fulfillment of development milestones.

Table of Contents

Cost of revenue

Comparison of the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 is as follows (in thousands of dollars, except percentages):

	Three Months Ended September 30,								Nine Months Ended September 30,
	2020		2019		Change			%	2020		2019		Change			%
Cost of testing revenue:
Laboratory costs	$	5,002	$	5,150	$	(148	)	(3)%	$	14,103	$	14,685	$	(582	)	(4)%
Sample collection costs		1,134		1,211		(77	)	(6)%		3,048		3,508		(460	)	(13)%
Compensation expense		1,707		1,510		197		13%		5,164		4,410		754		17%
License fees and royalties		11		3		8		267%		38		8		30		375%
Depreciation and amortization		271		260		11		4%		790		781		9		1%
Other expenses		377		414		(37	)	(9)%		1,174		1,324		(150	)	(11)%
Allocations		616		566		50		9%		1,840		1,688		152		9%
Total	$	9,118	$	9,114	$	4		0%	$	26,157	$	26,404	$	(247	)	(1)%

Cost of product revenue:
Product costs	$	885	$	—	$	885		NM	$	2,916	$	—	$	2,916		NM
License fees and royalties		163		—		163		NM		623		—		623		NM
Total	$	1,048	$	—	$	1,048		NM	$	3,539	$	—	$	3,539		NM

Cost of biopharmaceutical revenue:
Compensation expense	$	51	$	—	$	51		NM	$	127	$	—	$	127		NM
Other expenses		153		—		153		NM		445		—		445		NM
Total	$	204	$	—	$	204		NM	$	572	$	—	$	572		NM

Cost of testing revenue increased $4,000 for the three months ended September 30, 2020 compared to the same period in 2019. The increase in the cost of testing results primarily from an increase in compensation expense related to an average laboratory headcount increase of 6%, offset by decreases in laboratory costs and sample collection costs.

Cost of testing revenue decreased $0.2 million, or 1%, for the nine months ended September 30, 2020 compared to the same period in 2019. The decrease in laboratory costs was primarily related to a 9% decrease in the volume of genomic classifiers reported partially offset by a $1.1 million write-down of supplies for the potential expiration of reagents due to an anticipated decline in volumes resulting from the COVID-19 pandemic. The decrease in sample collection costs primarily related to a 9% decrease in the volume of genomic classifiers reported. The increase in compensation expense primarily relates to an average laboratory headcount increase of 11%.

Cost of product revenue is related to sales of Prosigna, which commenced in December 2019.

Cost of biopharmaceutical revenue includes labor costs incurred by our employees working on biopharmaceutical customer projects and pass-through expenses incurred on these projects. Biopharmaceutical revenue recognized in the prior year period was mainly for the sale of sequencing data and had no related costs.

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 Change % 2017 2016 Change %
Research and development expense:

Compensation expense $ 1,863
$ 2,071
$ (208 ) (10)% $ 6,212
$ 5,953
$ 259
4%
Direct research and development expense

432
1,074
(642 ) (60)% 2,006
3,295
(1,289 ) (39)%
Professional fees 231
238
(7 ) (3)% 696
637
59
9%
Depreciation and amortization 105
111
(6 ) (5)% 341
293
48
16%
Other expenses 120
152
(32 ) (21)% 445
512
(67 ) (13)%
Allocations 295
360
(65 ) (18)% 979
1,044
(65 ) (6)%
Total $ 3,046
$ 4,006
$ (960 ) (24)% $ 10,679
$ 11,734
$ (1,055 ) (9)%

Table of Contents

Research and development

Comparison of the three and nine months ended September 30, 2020 and 2019 is as follows (in thousands of dollars, except percentages):

	Three Months Ended September 30,								Nine Months Ended September 30,
	2020		2019		Change			%	2020		2019		Change			%
Research and development expense:
Compensation expense	$	2,783	$	2,432	$	351		14%	$	8,340	$	6,911	$	1,429		21%
Direct research and development expense		684		620		64		10%		2,557		1,611		946		59%
Professional fees		167		124		43		35%		450		448		2		0%
Depreciation and amortization		53		76		(23	)	(30)%		189		213		(24	)	(11)%
Other expenses		26		90		(64	)	(71)%		127		334		(207	)	(62)%
Allocations		329		301		28		9%		955		891		64		7%
Total	$	4,042	$	3,643	$	399		11%	$	12,618	$	10,408	$	2,210		21%

Research and development expense ~~decreased $960,000,~~increased $0.4 million, or ~~24%~~11%, for the three months ended September 30, ~~2017~~2020 compared to the same period in 2016. The decrease in compensation expense was primarily due to lower incentive compensation. The decrease in direct research and development expense was due to a lesser amount of materials purchased for research and development experiments following the completion of several major projects.

~~Research and development expense decreased $1.1 million, or 9%, for the nine months ended September 30, 2017 compared to the same period in 2016.~~2019. The increase in compensation expense was primarily due to a 10% increase in average headcount ~~partially offset by lower incentive compensation.~~and higher stock-based compensation expense from the increase in our stock price over the last two years. The ~~decrease~~increase in direct research and development expense was mainly due to an increase in clinical trial activity for our pipeline products.

Research and development expense increased $2.2 million, or 21%, for the nine months ended September 30, 2020 compared to the same period in 2019. The increase in compensation expense was primarily due to a ~~lesser amount of materials purchased for~~13% increase in average headcount and higher stock-based compensation expense from the increase in our stock price over the last two years. The increase in direct research and development ~~experiments following the completion of several major projects.~~

expense was mainly due to an increase in clinical trial activity for our pipeline products.

Selling and marketing

Comparison of the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 is as follows (in thousands of dollars, except percentages):

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 Change % 2017 2016 Change %
Selling and marketing expense:

Compensation expense $ 4,321
$ 3,372
$ 949
28% $ 13,056
$ 10,801
$ 2,255
21%
Direct marketing expense 1,202
671
531
79% 4,248
2,205
2,043
93%
Genzyme co-promotion expense, net —
1,590
(1,590 ) (100)% 3
5,103
(5,100 ) (100)%
Professional fees 810
168
642
382% 1,366
438
928
212%
Other expenses 1,099
857
242
28% 3,180
2,543
637
25%
Allocations 453
429
24
6% 1,362
1,326
36
3%
Total $ 7,885
$ 7,087
$ 798
11% $ 23,215
$ 22,416
$ 799
4%

	Three Months Ended September 30,								Nine Months Ended September 30,
	2020		2019		Change			%	2020		2019		Change			%
Selling and marketing expense:
Compensation expense	$	8,484	$	8,013	$	471		6%	$	29,334	$	24,136	$	5,198		22%
Direct marketing expense		751		1,221		(470	)	(38)%		2,456		4,585		(2,129	)	(46)%
Professional fees		318		555		(237	)	(43)%		1,005		1,646		(641	)	(39)%
Other expenses		568		2,505		(1,937	)	(77)%		3,616		6,832		(3,216	)	(47)%
Allocations		834		794		40		5%		2,829		2,309		520		23%
Total	$	10,955	$	13,088	$	(2,133	)	(16)%	$	39,240	$	39,508	$	(268	)	(1)%

Selling and marketing expense ~~increased $798,000,~~decreased $2.1 million, or ~~11%~~16%, for the three months ended September 30, ~~2017~~2020 compared to the same period in ~~2016.~~2019. The increase in compensation expense was primarily due to a ~~24%~~14% increase in average headcount ~~mainly~~and higher stock-based compensation expense from ~~increases of~~the increase in our ~~sales and marketing personnel due to~~stock price over the ~~termination of the Genzyme co-promotion agreement.~~last two years. The ~~increase~~decrease in direct marketing expense was due to ~~higher trade shows and~~lower general marketing ~~costs.~~expenditures. The decrease in Genzyme co-promotion expense, net, reflects the termination of the Genzyme co-promotion agreement effective September 9, 2016. The increase in professional fees is due to consulting expenses. The increase in other expenses iswas primarily due to decreased travel and ~~communication costs associated with the 24% increase in average headcount.~~

entertainment expenses as a result of COVID-19 travel restrictions.

Selling and marketing expense ~~increased $799,000,~~decreased $0.3 million, or 4%1%, for the nine months ended September 30, ~~2017~~2020 compared to the same period in ~~2016.~~2019. The increase in compensation expense was primarily due to ~~a 23% increase in~~an average headcount ~~mainly from increases~~increase of ~~our sales~~37%, higher incentive compensation and ~~marketing personnel due to~~higher stock-based compensation expense partially offset by the ~~termination~~temporary furloughing of ~~the Genzyme co-promotion agreement.~~employees beginning in April 2020. The ~~increase~~decrease in direct marketing expense was due to ~~corporate rebranding expenses, trade shows and~~lower general marketing ~~costs.~~expenditures. The decrease in Genzyme co-promotion expense, net, reflects the termination of the Genzyme co-promotion agreement effective September 9, 2016. The increase in professional fees is due to consulting expenses. The increase in other expenses iswas primarily due to decreased travel and ~~communication costs associated with the 23% increase in average headcount.~~entertainment expenses as a result of COVID-19 travel restrictions.

Table of Contents

General and administrative

Comparison of the three and nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 is as follows (in thousands of dollars, except percentages):

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 Change % 2017 2016 Change %
General and administrative expense:

Compensation expense $ 3,476
$ 3,893
$ (417 ) (11)% $ 11,464
$ 11,847
$ (383 ) (3)%
Professional fees 1,469
1,439
30
2% 4,571
4,396
175
4%
Occupancy costs 553
537
16
3% 1,600
1,940
(340 ) (18)%
Depreciation and amortization 420
400
20
5% 1,246
1,105
141
13%
Other expenses 805
725
80
11% 2,508
2,434
74
3%
Allocations (1,203 ) (1,231 ) 28
(2)% (3,658 ) (3,660 ) 2
—%
Total $ 5,520

$ 5,763

$ (243 ) (4)% $ 17,731
$ 18,062
$ (331 ) (2)%

	Three Months Ended September 30,										Nine Months Ended September 30,
	2020			2019			Change			%	2020			2019			Change			%
General and administrative expense:
Compensation expense	$	5,706		$	4,806		$	900		19%	$	15,798		$	13,600		$	2,198		16%
Professional fees		2,023			1,477			546		37%		7,458			5,687			1,771		31%
Occupancy expenses		673			615			58		9%		1,994			1,861			133		7%
Depreciation and amortization		391			363			28		8%		1,118			1,041			77		7%
Other expenses		1,532			1,024			508		50%		3,572			3,147			425		14%
Allocations		(1,779	)		(1,661	)		(118	)	7%		(5,624	)		(4,888	)		(736	)	15%
Total	$	8,546		$	6,624		$	1,922		29%	$	24,316		$	20,448		$	3,868		19%

General and administrative expense ~~decreased $243,000,~~increased $1.9 million, or 4%29%, for the three months ended September 30, ~~2017~~2020 compared to the same period in ~~2016.~~2019. The ~~decrease~~increase in compensation expense was primarily due to ~~lower incentive~~higher stock-based compensation expense ~~partially offset by a 6%~~from the increase in ~~average headcount~~our stock price over the last two years. The increase in professional fees was primarily consulting and legal-related. The increase in other expenses was primarily due to the revaluation of the contingent consideration for the ~~three months ended September 30, 2017 as compared to the same period in 2016.~~

NanoString transaction.

General and administrative expense ~~decreased $331,000,~~increased $3.9 million, or 2%19%, for the nine months ended September 30, ~~2017~~2020 compared to the same period in ~~2016.~~2019. The ~~decrease~~increase in compensation expense was primarily due to ~~lower incentive~~higher stock-based compensation ~~partially offset by a 8%~~expense from the increase in our stock price over the last two years. The increase in professional fees was primarily consulting, accounting and legal-related. The increase in other expenses was primarily due to the revaluation of the contingent consideration for the NanoString transaction.

Interest expense

Interest expense decreased $3,000, or 5%, for the three months ended September 30, 2020 compared to the same period in 2019, mainly due to the prepayments of $12.5 million and $12.4 million of the principal amount of our Term Loan Advance in January 2019 and May 2019, respectively. The average ~~headcount~~Term Loan Advance interest rate was 5.4% and 6.6% for the three months ended September 30, 2020 and 2019, respectively.

Interest expense decreased $421,000, or 71%, for the nine months ended September 30, ~~2017 as~~2020 compared to the same period in ~~2016. The increase in professional fees expense was~~2019, mainly due to ~~higher legal expenses offset by lower accounting~~the prepayments of $12.5 million and ~~consulting expenses.~~$12.4 million of the principal amount of our Term Loan Advance in January 2019 and May 2019, respectively. The ~~decrease in occupancy costs~~average Term Loan Advance interest rate was ~~largely due to incurring facilities expenses~~5.5% and 6.9% for the ~~three~~nine months ended ~~March 31, 2016 for our current South San Francisco facility, as well as our previous space, for which the lease ended in March 2016. The increase in depreciation~~September 30, 2020 and ~~amortization expenses was due to more assets put into service.~~

~~Interest expense~~

~~Interest expense increased $16,000~~2019, respectively.

Other income, net

Other income, net, decreased $1.1 for the three months ended September 30, ~~2017~~2020 compared to the same period in ~~2016~~2019 primarily due to ~~our debt principal increasing~~lower dividend and interest income from our ~~election to pay interest in-kind for the quarters ended September 30, 2016~~investments and ~~interest from a capital lease entered into in December 2016.~~

~~Interest expense increased $472,000~~cash and cash equivalents.

Other income, net, decreased $1.8 for the nine months ended September 30, ~~2017~~2020 compared to the same period in 2016 due to higher interest on the term loan of $25.0 million under a credit agreement entered into in March 2016 and interest from a capital lease entered in December 2016, compared to the interest, end-of-term payment, prepayment penalty and write-off of debt issuance costs on the prior loan and security agreement that was paid off in March 2016, which had a lower nominal principal balance of $5.0 million.

~~Other income (expense), net~~

~~Other income, net, increased $86,000 for the three months ended September 30, 2017 compared to the same period in 2016~~2019 primarily due to ~~higher~~lower dividend and interest income from our ~~money market investments.~~investments cash and cash equivalents.

~~Other income, net, increased $226,000 for the nine months ended September 30, 2017 compared to the same period in 2016 primarily due to higher interest income from our money market investments.~~

Liquidity and Capital Resources

From inception through September 30, 2020, we have been financed primarily through net proceeds from the sale of our equity securities and borrowings under our credit facilities. We have incurred net losses since our inception. For the nine months ended September 30, ~~2017,~~2020, we had a net loss of ~~$22.6~~$26.9 million, and as of September 30, ~~2017,~~2020, we had an accumulated deficit of ~~$202.6~~$273.6 million. We expect to incur additional losses for the remainder of 2020 and potentially in ~~the~~ future ~~and may never achieve revenue sufficient to offset our expenses.~~

years.

We believe our existing cash and cash equivalents of ~~$41.2~~$345.1 million as of September 30, ~~2017~~2020, our available revolving line of credit, 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 inception through September 30, 2017, we have received $251.1 million in net proceeds from various sources to finance our operations, including net proceeds of $78.6 million from sales of our preferred stock, net proceeds of $59.2 million from our IPO, net proceeds of $37.3 million from our sale of common stock in a private placement, net proceeds of $32.1 million from our sale of common stock in a public offering, $10.0 millionmonths from the Genzyme co-promotion agreement, net borrowings of $4.9 million under our loan and security agreement which was repaid in full in March 2016, net borrowings of $24.5 million under our credit agreement described below, $4.1 million from the exercise of stock options and purchases of stock under our employee stock purchase plan and conversion of accrued interest to long-term debt of $0.4 million.

~~Loan and Security Agreement~~

On November 3, 2017, we entered into a loan and security agreement (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 advance term loan (the “Term Loan Advance”) and a revolving line of credit of up to $10.0 million (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 Advance 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 Advance bears interest at a variable rate equal to (i) the thirty-day U.S. London Interbank Offer Rate (“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.

The Loan and Security Agreement contains customary representations, warranties, and events of default, as well as affirmative and negative covenants. The negative covenants include, among other provisions, covenants that limit or restrict our ability to incur liens, make investments, incur indebtedness, merge with or acquire other entities, dispose of assets, make dividends or other distributions to holders of its equity interests, engage in any new line of business, or enter into certain transactions with affiliates, in each case subject to certain exceptions.

The Loan and Security Agreement also requires us to comply with certain financial covenants, including maintaining certain revenue levels tested quarterly on a trailing twelve-month basis. However, failure to maintain the revenue levels will not be considered a default if we maintain liquidity of at least $40.0 million.

~~Our obligations under the Loan and Security Agreement are secured by substantially all of our assets (excluding intellectual property), subject to certain customary exceptions.~~

~~Credit Agreement~~

In March 2016, we entered into a credit agreement, or Credit Agreement, with Visium Healthcare Partners, LP, or Visium. Under the Credit Agreement, two term loans were available to us with an aggregate principal amount of up to $40.0 million. We drew down the initial $25.0 million term loan, or Term Loan, on March 30, 2016. On or prior to June 30, 2017, we were permitted to request a second term loan of up to $15.0 million; however, we did not draw down the second term loan and it expired. The Term Loan matures on March 31, 2022.

~~The Term Loan bears interest at a fixed rate of 12.0% per annum, payable quarterly at the end of each March, June,~~

September and December. No principal payments will be due during an interest-only period, commencing on the funding date for the Term Loan, or Borrowing Date, and continuing through and including March 31, 2020. We are obligated to repay the outstanding principal amount under the Term Loan in eight equal installments during the final two years under the Credit Agreement. For any quarterly interest payment through and including the 16th interest payment date after the Borrowing Date, so long as no event of default has occurred and is then continuing, we may elect to pay interest in cash on the outstanding principal amount of the Term Loan at a fixed rate of 9.0%, with the remaining 3.0% of the 12.0% interest paid-in-kind by adding such paid-in-kind interest to

the outstanding principal amount of the Term Loan. We elected to pay interest in-kind for the quarters ended June 30, 2016 and September 30, 2016 and have recorded $385,000 of paid-in-kind interest through September 30, 2017.

We may prepay the outstanding principal amount under the Term Loan subject to a minimum of $5.0 million of principal amount or a whole multiple of $1.0 million in excess thereof plus accrued and unpaid interest and a prepayment premium. The prepayment premium will be assessed on the principal amount repaid and will equal (i) 24.0% less the aggregate amount of all interest payments in cash, if the prepayment is made on or prior to March 31, 2018, (ii) 4.0%, if the prepayment is made after March 31, 2018 and on or prior to March 31, 2019, (iii) 2.0%, if the prepayment is made after March 31, 2019 and on or prior to March 31, 2020, and (iv) 1.0%, if the prepayment is made after March 31, 2020 and on or prior to March 31, 2021. After March 31, 2021 there is no prepayment premium.

Our obligations under the Credit Agreement are secured by a security interest in substantially all of our assets. The Credit Agreement contains customary representations, warranties and events of default, as well as affirmative and negative covenants. The negative covenants include, among other provisions, covenants that limit or restrict our ability to incur liens, make investments, incur indebtedness, merge with or acquire other entities, dispose of assets, make dividends or other distributions to holders of its equity interests, engage in any material new line of business or enter into certain transactions with affiliates, in each case subject to certain exceptions. The Credit Agreement also includes financial covenants requiring minimum cash and cash equivalents balances and minimum revenues. To the extent we form or acquire certain subsidiaries domiciled in the United States, those subsidiaries are required to be guarantors of our obligations under the Credit Agreement. As of September 30, 2017, we were in compliance with the loan covenants.

In connection with the entry into the Loan and Security Agreement discussed above, we terminated the Credit Agreement with Visium, wherein all commitments were terminated, all liens were released and all outstanding principal and interest and fees accrued thereunder were repaid in the aggregate amount of $27.3 million.

~~2013 Loan Agreement~~

In June 2013, we entered into a loan and security agreement as subsequently amended, or the 2013 Loan Agreement, with a financial institution that provided for borrowings of up to $10.0 million in aggregate. Borrowings under the 2013 Loan Agreement totaled $5.0 million, which was outstanding at January 1, 2015 and into 2016 until such amount was repaid upon us entering into the Credit Agreement discussed above.

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, research and development~~ expenses, general and administrative expenses, working capital, ~~debt~~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 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, including due to the impacts of the COVID-19 pandemic, 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 ~~loan~~our Loan and ~~security agreements~~Security Agreement and other operating restrictions that could adversely affect our ability to conduct our business. Our ~~current credit agreement~~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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Public Offering of Common Stock

On August 7, 2020, we issued and sold 6,900,000 shares of common stock in a registered public offering, including 900,000 shares issued and sold upon the underwriters’ exercise in full of their option to purchase additional shares, at a price to the public of $30.00 per share. Our net proceeds from the offering were approximately $193.8 million, after deducting underwriting discounts and commissions and offering expenses of $13.2 million.

On May 7, 2019, we issued and sold 6,325,000 shares of common stock in a registered public offering, including 825,000 shares issued and sold upon the underwriters’ exercise in full of their option to purchase additional shares, at a price to the public of $23.25 per share. Our net proceeds from the offering were approximately $137.8 million, after deducting underwriting discounts and commissions and offering expenses of $9.2 million.

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. The average Term Loan Advance interest rate for the nine months ended September 30, 2020 was 5.5%.

We may prepay the outstanding principal amount under the Term Loan Advance plus accrued and unpaid interest and, if the Term Loan Advance is repaid in full, a prepayment premium. The prepayment premium will equal (i) $750,000, if the prepayment is made on or before November 3, 2018, (ii) $500,000, if the prepayment is made after November 3, 2018 and on or prior to November 3, 2019 and (iii) $250,000, if the prepayment is made after November 3, 2019. In addition, a final payment on the Term Loan Advance in the amount of $1.2 million is due upon the earlier of the maturity date of the Term Loan Advance or its payment in full. In January 2019, May 2019 and August 2020, we prepaid $12.5 million, $12.4 million and $0.1 million of the principal amount of the Term Loan Advance, respectively, and did not incur any prepayment premium as we did not repay the Term Loan Advance in full. As of September 30, 2020, the principal balance outstanding was one dollar.

The Loan and Security Agreement contains customary representations, warranties, and events of default such as a material adverse change in our business, operations or financial conditions, as well as affirmative and negative covenants. The negative covenants include, among other provisions, covenants that limit or restrict our ability to incur liens, make investments, incur indebtedness, merge with or acquire other entities, dispose of assets, make dividends or other distributions to holders of our equity interests, engage in any new line of business, or enter into certain transactions with affiliates, in each case subject to certain exceptions. As of September 30, 2020, we were in compliance with our debt covenants.

The Loan and Security Agreement also requires us to comply with certain financial covenants, including achieving certain revenue levels tested quarterly on a trailing twelve-month basis. However, failure to maintain the revenue levels will not be considered a default if the sum of our unrestricted cash and cash equivalents maintained with Silicon Valley Bank and amount available under the Revolving Line of Credit is at least $40.0 million.

Our obligations under the Loan and Security Agreement are secured by substantially all of our assets (excluding intellectual property), subject to certain customary exceptions.

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Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, ~~2017~~2020 and ~~2016~~2019 (in thousands of dollars):

Nine Months Ended September 30,
2017 2016
Cash used in operating activities $ (18,099 ) $ (23,750 )
Cash used in investing activities (895 ) (3,762 )
Cash provided by financing activities 970
20,127

	Nine Months Ended September 30,
	2020			2019
Cash used in operating activities	$	(11,972	)	$	(5,022	)
Cash used in investing activities		(2,949	)		(1,633	)
Cash provided by financing activities		200,684			124,322

Cash Flows from Operating Activities

Cash used in operating activities for the nine months ended September 30, ~~2017~~2020 was ~~$18.1~~$12.0 million. The net loss of ~~$22.6~~$26.9 million includes non-cash charges of $9.4 million of stock-based compensation expense, $5.9 million of depreciation and amortization, which includes $3.8 million of intangible asset amortization, a $1.1 million write-down of supplies, noncash lease expense of $0.7 million and a $0.3 million expense for the revaluation of the contingent consideration related to the NanoString transaction. Cash used as a result of changes in operating assets and liabilities was $2.7 million, primarily comprised of a decrease in accrued liabilities of $3.3 million, a decrease in operating lease liability of $1.0 million, and an increase in prepaid expense and other current assets of $0.9 million, partially offset ~~primarily~~ by ~~$4.8~~a decrease in accounts receivable of $1.7 million and a decrease in supplies of $1.3 million.

Cash used in operating activities for the nine months ended September 30, 2019 was $5.0 million. The net loss of $5.1 million includes non-cash charges of $7.0 million of stock-based compensation expense and $2.8 million of depreciation and amortization, which includes $0.8 million of intangible asset ~~amortization.~~amortization, and noncash lease expense of $0.8 million. Cash used as a result of changes in operating assets and liabilities ~~of $3.3~~was $10.7 million, ~~was~~ primarily ~~due to~~comprised of an increase in accounts receivable of ~~$2.9~~$10.4 million, increase in supplies of $3.2 million and a ~~net~~ decrease in operating lease liability of $0.9 million, partially offset by increases in accounts payable and accrued liabilities and deferred rent of ~~$0.3 million, primarily from the payment of annual bonuses for 2016.~~

Cash used in operating activities for the nine months ended September 30, 2016 was $23.8 million. The net loss of $27.0 million includes non-cash charges of $0.9 million in amortization of the deferred fee received from Genzyme, offset primarily by $4.7 million of stock-based compensation expense, $2.6 million of depreciation and amortization, which includes $0.8 million of intangible asset amortization, $0.4 million from the conversion of accrued interest to long-term debt, and $0.3 million in interest and prepayment penalty relating to the repayment of our borrowings under our previous loan and security agreement. Cash used as a result of changes in operating assets and liabilities of $4.0 million was primarily due to an increase in accounts receivable of $2.9$2.5 million and ~~a decrease in accrued liabilities and deferred rent of $1.1 million.~~

$1.3 million, respectively.

Cash Flows from Investing Activities

Cash used in investing activities for the nine months ended September 30, ~~2017~~2020 was ~~$0.9 million, mainly comprising $1.5~~$1.9 million for the acquisition of property and equipment ~~partially offset by $0.4~~and $1.0 million for the purchase of ~~proceeds from the sale~~equity securities of ~~property and equipment.~~

MAVIDx, Inc.

Cash used in investing activities for the nine months ended September 30, ~~2016~~2019 was ~~$3.8~~$1.6 million for the acquisition of property and equipment, ~~primarily for~~net of proceeds from the ~~build out~~disposal of ~~office space~~property and ~~laboratory for our South San Francisco facility.~~

equipment.

Cash Flows from Financing Activities

Cash provided by financing activities for the nine months ended September 30, ~~2017~~2020 was ~~$1.0~~$200.7 million, consisting of ~~$1.0~~$193.8 million in net proceeds from the issuance of common stock in a public offering in August 2020, $10.1 million in proceeds from the ~~purchase of stock under our ESPP and~~ exercise of options to purchase our common stock and ~~$0.2~~purchase of stock under our Employee Stock Purchase Plan, or ESPP, partially offset by $3.2 million in ~~cost reimbursements received~~tax payments during the period related to ~~our issuance~~the vesting of ~~common~~restricted stock ~~in a public offering in the fourth quarter of 2016, offset by capital lease payments of $0.2 million during the period.~~

units granted to employees.

Cash provided by financing activities for the nine months ended September 30, ~~2016~~2019 was ~~$20.1 million. The financing activities for the nine months ended September 30, 2016 consisted~~$124.3 million, consisting of ~~$24.5~~$137.8 million ofin net proceeds from the ~~draw down~~issuance of ~~the Term Loan~~common stock in a public offering in May 2019 and ~~$1.0~~$12.4 million in proceeds from the exercise of options to purchase our common stock and purchase of stock under our ESPP during the period, partially offset by ~~the payment of $5.0 million for the remaining principal balance and a $0.3~~$24.9 million of ~~end-of-term payment and prepayment penalty~~loan principal repayments, $0.8 million in tax payments during the period related to ~~our previous loan~~the vesting of restricted stock units granted to employees and ~~security agreement that we repaid on March 30, 2016.~~

finance lease payments of $0.2 million.

Contractual Obligations

In January 2019, May 2019 and August 2020, we prepaid $12.5 million, $12.4 million and $0.1 million of the principal amount of the Term Loan Advance, respectively, under our Loan and Security Agreement. As of September 30, 2020, future principal and end-of-term debt obligation payments due under the Loan and Security Agreement are limited to $1.2 million in 2022. There were no material changes during the interim period in the contractual obligations presented in our Form 10-K for the year ended December 31, ~~2016~~2019 filed with the Securities and Exchange Commission on ~~March 1, 2017.~~

February 25, 2020.

Off-balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements.

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Recent Accounting Pronouncements

In ~~May 2014,~~June 2016, the ~~Financial Accounting Standards Board ("FASB")~~FASB issued ASU ~~2014-09,~~ ~~Revenue~~No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU requires entities to estimate an expected lifetime credit loss on financial assets ranging from ~~Contracts with Customers~~ ~~(Topic 606),~~short-term trade accounts receivable to ~~supersede nearly all existing revenue recognition~~long-term financings and report credit losses using an expected losses model rather than the incurred losses model that was previously used, and establishes additional disclosures related to credit risks. This guidance ~~under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the~~

~~consideration that is expected to be received~~became effective for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. We will adopt the new revenue standard as ofus beginning January 1, ~~2018 using~~2020. Based on the ~~modified retrospective method. We have completed~~composition of our ~~assessment of the five steps of this ASU~~trade receivables, investment portfolio and ~~believe that~~other financial assets, current economic conditions and historical credit loss activity, the adoption of this ~~ASU will~~standard did not ~~result in a material cumulative catch-up adjustment under the modified retrospective method, or~~ have a material impact on our condensed consolidated financial ~~position or results of operations.~~

statements and related disclosures.

In ~~February 2016,~~November 2018, the FASB issued ASU No. ~~2016-2,~~ ~~Leases~~2018-18, Collaborative Arrangements (Topic 808). ~~This~~Under this ASU, ~~is aimed at making leasing activities more transparent and comparable, and requires substantially all leases~~transactions in collaborative arrangements are to be ~~recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently~~ accounted for ~~as operating leases. The ASU will be effective~~under ASC 606 if the counterparty is a customer for ~~interim~~a good or service (or bundle of goods and ~~annual periods beginning after December 15, 2018. Entities~~services) that is a distinct unit of account. Also, entities are ~~required to use~~precluded from presenting consideration from transactions with a ~~modified retrospective approach for leases~~counterparty that ~~exist or are entered into after the beginning of the earliest comparative period in the financial statements. Full retrospective application~~ is ~~prohibited and early adoption is permitted. We are currently evaluating the potential effect of this standard on our financial statements.~~

~~In March 2016, the FASB issued ASU 2016-9,~~ ~~Compensation - Stock Compensation~~, related to the tax effects of share-based awards. The ASU requires that all the tax effects of share-based awards be recorded through the income statement, thereby simplifying the current guidance that requires excess tax benefits and certain excess tax deficiencies to be recorded in equity. This ASU also permits an election for the impact of forfeitures on the recognition of expense for share-based payment awards where forfeitures can be estimated ornot a customer together with revenue recognized ~~when they occur.~~from ASC 606. This ASU is effective for all interim and annual reporting periods beginning on or after December 15, ~~2016.~~2019, with early adoption permitted. We adopted this ASU as of January 1, 2017 and elected to continue using our forfeiture estimation method for share-based payment awards. This ASU was adopted prospectively and the impact of adoption on our financial statements was not material.

in 2019 with no cumulative-effect adjustments or retrospective impact.

In ~~November 2016,~~August 2018 the FASB issued ASU ~~2016-18,~~ ~~Statement of Cash Flows - Restricted Cash.~~ No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ~~ASU requires that restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling~~standard clarifies the ~~beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU will be~~accounting for implementation costs in cloud computing arrangements. This standard became effective for ~~interim~~us on January 1, 2020 and ~~annual periods~~was adopted on a prospective basis with no material impact on our condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. ASU 2018-13 removed the following disclosure requirements: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. Additionally, this update added the following disclosure requirements: (1) the changes in unrealized gains and losses for the period included in other comprehensive income and loss for recurring Level 3 fair value measurements held at the end of the reporting period; (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 became effective for us beginning ~~after December 15, 2017. We do not anticipate that~~January 1, 2020 and the adoption of ~~this~~ ASU ~~will~~2018-13 did not have a ~~significant~~material impact on our condensed consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rates. We had cash and cash equivalents of ~~$41.2~~$345.1 million as of September 30, ~~2017~~2020 which include bank deposits and money market funds. Such interest-bearing instruments carry a degree of risk; however, a hypothetical 10% change in interest rates during any of the periods presented would not have had a material impact on our unaudited interim condensed financial statements.

Under our Loan and Security Agreement, we pay interest on any outstanding balances under this agreement based on a variable market rate. A significant change in these market rates may adversely affect our operating results.

ITEM 4. CONTROLS AND PROCEDURES


(a)	Evaluation of Disclosure Controls and Procedures

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

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.


(b)	Changes in Internal Control over Financial Reporting

We continuously seek to improve the efficiency and effectiveness of our internal controls. This results in refinements to processes throughout the Company. There were no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation identified above that occurred during the quarter ended September 30, ~~2017~~2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

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PART II. — OTHER INFORMATION

ITEM 1A. RISK FACTORS

Risks Related to Our Business

We ~~are an emerging growth company with~~have a history of losses, and we expect to incur net losses for the foreseeable future and may never achieve or sustain profitability.

We have incurred net losses since our inception. For the nine months ended September 30, ~~2017,~~2020, we had a net loss of ~~$22.6~~$26.9 million and as of September 30, ~~2017,~~2020, we had an accumulated deficit of ~~$202.6~~$273.6 million. We expect to incur additional losses in the future, and we may never achieve revenue sufficient to offset our expenses. Over the next couple of years, we expect to continue to devote substantially all of our resources to increase adoption of and reimbursement for our Afirma, ~~tests,~~ Percepta ~~our lung cancer~~and Envisia classifiers and Prosigna test, ~~which we launched in April 2015, Envisia, our test for idiopathic pulmonary fibrosis, or IPF, which we launched in October 2016,~~ and the development of additional tests. We may never achieve or sustain profitability, and our failure to achieve and sustain profitability in the future could cause the market price of our common stock to decline.

The outbreak of COVID-19 has had an adverse effect on our business, results of operations and financial condition.

COVID-19 has caused significant volatility in financial markets and has raised the prospect of an extended global recession. Public health problems resulting from COVID-19 and precautionary measures instituted by governments and businesses to mitigate its spread, including travel restrictions and quarantines, have contributed to a general slowdown in the global economy, adversely impacted patients, physicians, customers, suppliers, third-party contract manufacturers, and collaboration partners, and disrupted our operations. Changes in our operations in response to COVID-19 or employee illnesses resulting from the pandemic may result in inefficiencies or delays, including in sales and product development efforts and additional costs related to business continuity initiatives, that cannot be fully mitigated through succession planning, employees working remotely or teleconferencing technologies. The cumulative incidence rate of COVID-19 cases in the United States reported to the CDC increased from 0.2 million at March 31, 2020, to 2.6 million at June 30, 2020 and to 7.2 million at September 30, 2020. During the second half of March 2020, we experienced a significant decline in the volume of samples received. Our monthly reported genomic volumes reached a year-to-date low point in April 2020. Following the April 2020 low point, sequential monthly total reported genomic volume increased in both May and June 2020. As a result of the impact on our volumes, we reported a significant decline in sequential and year-over-year revenue for the quarter ended June 30, 2020. For the quarter ended September 30, 2020, our total reported genomic volume, relative to the prior year quarter, increased 3% from 9,941 to 10,242, principally from an increase in reported genomic volume for both our Afirma GSC and Envisia Genomic Classifier tests, offset by a decline in our Percepta GSC. As of October 13, 2020, the cumulative incidence rate of COVID-19 cases in the United States is approximately 7.8 million and currently there is no commercially available vaccine. We expect federal, state and local agencies to continue to take steps to combat the virus and to reduce the incidence of new cases. We believe these actions negatively impact our volumes and revenue and limit our ability to reliably forecast our test volumes or levels of revenue.

COVID-19 and related governmental reactions have had and may continue to have a negative impact on our business, liquidity, results of operations, and stock price due to the occurrence of some or all of the following events or circumstances among others:

•

We may not be able to manage our business effectively due to key employees becoming ill, working from home inefficiently and being unable to travel to our facilities.

•

We and our customers, suppliers, third-party contract manufacturers, and collaboration partners may be prevented from operating worksites, including manufacturing facilities, due to employee illness or reluctance to appear at work and “stay-at-home” regulations.

•

Interruptions in manufacturing (including the sourcing of reagents or supplies) and shipment of our products. According to Johns Hopkins Coronavirus Resource Center, daily COVID-19 test volume has increased from less than approximately 0.2 million tests per day in April 2020 to between 0.8 million and 1.0 million tests per day in the first half of October 2020. We believe the rapid increase in daily testing volumes is consuming reagents and supplies otherwise available to genomic testing companies like ours across the United States. In October, we experienced supply chain disruptions in the supply of plastic materials used in the processing of samples. When not limited by the expiration date of products and when we feel it reasonable and feasible to do so, we are taking steps to increase our level of stock reserves, to develop alternative sources of supply and to implement procedures to mitigate the impact on our supply chain or our ability to process samples in our laboratories. Though we are in regular contact with our key suppliers, we do not have, nor expect to have, the necessary insight into our vendors’ supply chain issues that we may need to know to effectively mitigate the impact to our business. Though we attempt to mitigate the impact to our business, these interruptions in manufacturing (including the sourcing of reagents or supplies) may negatively impact our test volumes or levels of revenue.

•

Reduced patient demand for, or provider capacity to deliver, diagnostic testing and elective procedures generally.

•

Disruptions of the operations of our third-party contract manufacturers and suppliers, which could impact our ability to purchase components at efficient prices and in sufficient amounts.

•

We may need to raise capital, and if we raise capital by issuing equity securities, our common stock may be diluted.

•

The market price of our common stock may drop or remain volatile.

•

We may incur significant employee health care costs under our insurance programs.

The extent of the impact of COVID-19 on our business and financial results will depend largely on future developments, including the duration of the spread of the outbreak, the impact on capital and financial markets and the related impact on the financial circumstances of patients, physicians, suppliers, third-party contract manufacturers, and collaboration partners, all of which are highly uncertain and cannot be predicted. This situation is changing rapidly, and additional impacts may arise that we are not aware of at this time.

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

Most of our revenue to date has been derived from the sale of our Afirma tests, which are used in the diagnosis of thyroid cancer. Over the next few years, we expect to continue to derive a substantial portion of our revenue from sales of our Afirma tests. In the third quarter of 2017, we began recognizing revenue from the sale of our Percepta test, used in the diagnosis of lung cancer. We also launched our Envisia test to help improve the diagnosis of interstitial lung disease, specifically IPF, and began recognizing revenue from Envisia in ~~October 2016.~~the second quarter of 2019. In December 2019, we acquired the rights to the Prosigna test from NanoString Technologies, Inc. and commenced marketing and selling Prosigna test kits to U.S. and international customers. Once genomic tests are clinically validated and commercially available for patient testing, we must continue to develop and publish evidence that our tests are informing clinical decisions in order for them to receive positive coverage decisions by payers. Without coverage policies, our tests may not be reimbursed and we will not be able to recognize revenue. We cannot guarantee that tests we commercialize will gain and maintain positive coverage decisions and therefore, we may never realize revenue from tests we commercialize. In addition, we are in various stages of research and development for other diagnostic solutions that we may offer, but there can be no assurance that we will be able to identify other diseases that can be effectively addressed or, if we are able to identify such diseases, whether or when we will be able to successfully commercialize solutions for these diseases and obtain the evidence and coverage decisions from payers. If we are unable to increase sales and expand reimbursement for our Afirma, Percepta, Envisia and ~~Percepta~~Prosigna tests, ~~or successfully obtain coverage and reimbursement for our Envisia test~~ or develop and commercialize other solutions, our revenue and our ability to achieve and sustain profitability would be impaired, and the market price of our common stock could decline.

~~If we are not able to successfully transition to our next-generation Afirma GSC, our business, operating results and competitive position could be harmed.~~

We are in the process of transitioning our customers to our next-generation Afirma Genomic Sequencing Classifier, or GSC, that uses a new technology platform for the Afirma genomic classifier testing. There are risks associated with this transition that include, but are not limited to, operational implementation, reimbursement, and customer adoption risks. If we are unable to effectively transition to the new platform, our business, financial condition and results of operations could be adversely effected and our reputation and competitive position could be harmed.

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

Revenue for tests performed on patients covered by Medicare and UnitedHealthcare Group was ~~26%~~24% and ~~14%~~11%, respectively, of our revenue for the nine months ended September 30, ~~2017,~~2020, compared with ~~27%~~24% and ~~12%~~11%, respectively, for the nine months ended September 30, ~~2016.~~2019. The percentage of our revenue derived from significant payers is expected to fluctuate from period to period as our revenue ~~increases,~~fluctuates, as additional payers provide reimbursement for our tests or if one or more payers were to stop reimbursing for our tests or change their reimbursed amounts. Effective January 2012, Palmetto GBA, the regional Medicare ~~administrative contractor,~~Administrative Contractor, or MAC, that handled claims processing for Medicare services ~~with~~over our jurisdiction at that time, issued coverage and payment determinations for our Afirma Classifiers now covered by Noridian Healthcare Solutions, the ~~Afirma Gene Expression~~current MAC for our jurisdiction, through the Molecular Diagnostics Services Program, or MolDX program, administered by Palmetto GBA, under a Local Coverage Determination, or LCD.

Noridian Healthcare Solutions issued an LCD for Percepta effective for services performed on or after May 2017. This coverage policy requires us to establish and maintain a Certification and Training Registry program and make Percepta available only to certain Medicare patients through physicians who participate in this program. Failure by us or physicians to comply with the requirements of the Certification and Training Registry program could lead to loss of Medicare coverage for Percepta, which could have an adverse effect on our revenue.

We submitted the dossier of clinical evidence needed to obtain Medicare coverage for the Envisia Genomic Classifier ~~or GEC.~~ through the MolDX technical assessment process in 2018, and received notice of Medicare coverage for the classifier in the first quarter of 2019, with an effective date of April 1, 2019.

An LCD was issued for Prosigna by Palmetto GBA in August 2015, which has been in effect since October 1, 2015.

On a five-year rotational basis, Medicare requests bids for its regional MAC services. Any future changes in the MAC processing or coding for Medicare claims for the Afirma, ~~GEC~~Percepta or ~~Afirma GSC~~Envisia classifiers, or for Prosigna, could result in a change in the coverage or reimbursement rates for such products, or the loss of ~~coverage.~~

coverage, and could also result in increased difficulties in obtaining and maintaining coverage for future products.

On March 1, 2015, ~~a separate~~an American Medical Association Current Procedural Terminology code, or CPT code, 81545 for the Afirma GEC was issued. ~~In September 2017, we received preliminary~~On January 1, 2018, the Medicare ~~pricing indicating that~~Clinical Laboratory Fee Schedule payment rate for the Afirma classifier ~~price will increase~~increased from $3,220 to $3,600. ~~The preliminary Afirma classifier~~This rate is based on the volume-weighted median of private payer rates based on final payments ~~submitted by us~~made between January 1 and June 30, 2016, which we reported to the Centers for Medicare & Medicaid Services, or CMS, in 2017 as ~~part of the market-based payment reforms mandated through~~required under the Protecting Access to Medicare Act of 2014, or PAMA. ~~Pending a public comment~~In December 2019, through the Further Consolidated Appropriations Act of 2020, Congress delayed the next data reporting period ~~the~~from 2020 to 2021 for final ~~rates are scheduled to begin~~payments made between January 1 ~~2018,~~and June 30, 2019, extending the applicability of the payment rates based on 2017 reporting by one year through December 31, 2021. In March 2020, through the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress further delayed the next reporting period to 2022 for final payments made between January 1 and June 30, 2019, extending the applicability of the payment rates based on 2017 reporting through December 31, 2022.

As a result of the transition from Afirma GEC to Afirma GSC, a new CPT Category I code (81XX2) was established for the Afirma classifier, effective January 1, 2021. This code is currently going through the national payment determination process for Medicare. Although CMS has proposed to price 81XX2 at the same rate of $3,600 as ~~part~~81545, there can be no assurance that CMS will not finalize a lower payment rate for the new code. New CPT Proprietary Laboratory Analyses (PLA) codes have also been established for Afirma Xpresion Atlas (0204U) and Afirma MTC (0208U), effective October 1, 2020. CMS has proposed to price 0204U at the same rate of ~~PAMA.~~$2,919.60 as CPT 81455. CMS has proposed to price 0208U at the same rate of $3,600 as CPT 81545. There is likewise no assurance that CMS will not finalize a lower payment rate for these codes. The new payment rates for 81XX2, 0204U, and 0208U will take effect January 1, 2021.

After 81XX2 is priced, we expect the volume-weighted median of private payer rates for final payments made from January through June 2019 under 81545 to be reported in January through March 2022 under 81XX2. We ~~cannot assure you~~expect the weighted median of these rates to set the payment rate for the Afirma classifier (under 81XX2) from January 1, 2023 through December 31, 2025. There can be no assurance that the ~~preliminary~~Afirma or Prosigna rates (or the rates for Afirma Xpresion Atlas or Afirma MTC) will not decrease during this or a subsequent reporting cycle under PAMA.

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We submit claims to Medicare for Percepta using an unlisted code under the MolDX program. A specific CPT code assigned to Percepta may be required to go through the national payment determination process, and there can be no assurance that the Medicare payment rate Percepta receives through this process will not be lower than its current rate. There can also be no assurance that the Medicare payment rate for Percepta will not be reduced ~~prior~~when it is set based on the volume-weighted medians of private payer rates when we are required to ~~effectiveness.~~report private payer rates for Percepta under PAMA.

We currently submit claims to Medicare for Envisia using an unlisted code under the MolDX program. A specific CPT code (81XX1) was assigned to Envisia, effective January 1, 2021. We applied for New Advanced Diagnostic Laboratory Test (ADLT) designation for Envisia, and the test was approved as a New ADLT on September 17, 2020. Effective October 1, 2020 through June 30, 2021, the Medicare payment rate for Envisia will be set at $5,500, the “actual list charge” for the test. Veracyte will report private payer rates for Envisia from March 1, 2021 through March 31, 2021, reflecting final payments between October 1, 2020 and February 28, 2021. The volume-weighted median of these reported rates will set the payment rate for Envisia from July 1, 2021 through December 31, 2022, after which Envisia will be priced based on private payer rates collected and reported annually. Insofar as the actual list charge of $5,500 substantially exceeds the reported private payer rates (by more than 30%), CMS will have the ability to recoup excess payments (above 130% of the reported private payer rate) made during the initial nine-month payment period. There can also be no assurance that the Medicare payment rate for Envisia will not be reduced when it is set based on the volume-weighted medians of private payer rates when we are required to report private payer rates for Envisia under PAMA, or that CMS will not recoup amounts paid for Envisia based on the difference between the actual list charge and the volume-weighted median of private payer rates reported by Veracyte.

Moreover, federal Medicare funding and state budgets are limited and have been placed under tremendous strain in recent years, which is likely to be further exacerbated as a result of reduced tax receipts and greater deficit spending as a result of the COVID-19 pandemic. Such budgetary pressures may force Medicare or state agencies to reduce payment rates or change coverage policies. If there is a decrease in the ~~current~~ Medicare or other payers’ payment ~~rate~~rates for our tests, our revenue from Medicare and such payers will decrease and the payment rates for some of our commercial payers may also decrease if they tie their allowable rates to the Medicare ~~rate, which~~rates. These changes could have an adverse effect on our business, financial condition and results of operations.

Although we have entered into contracts with certain third-party payers that establish in-network allowable rates of reimbursement for our Afirma tests, payers may suspend or discontinue reimbursement at any time, may require or increase co-payments from patients, or may reduce the reimbursement rates paid to us. ~~Any such actions~~Reductions in private payer amounts could decrease the Medicare payment rates for our tests under PAMA. In addition, private payers have begun requiring prior authorization for molecular diagnostic tests. Potential reductions in reimbursement rates or increases in the difficulty of achieving payment could have a negative effect on our revenue.

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

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

~~not experimental or investigational;~~

~~pre-authorized and appropriate for the specific patient;~~

~~cost-effective;~~

~~supported by peer-reviewed publications; and~~

~~included in clinical practice guidelines.~~

•

not experimental or investigational;

•

pre-authorized and appropriate for the specific patient;

•

cost-effective;

•

supported by peer-reviewed publications; and

•

included in clinical practice guidelines.

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

We do not have a contracted rate of reimbursement with ~~many~~some payers for ~~the Afirma or Percepta tests, and we do not have any contracted reimbursement with any payers with respect to the Envisia test.~~our tests. Without a contracted rate for reimbursement, our claims are often denied upon submission, and we must appeal the claims. The appeals process is time consuming and expensive, and may not result in payment. In cases where there is no contracted rate for reimbursement, there is typically a greater patient co-insurance or co-payment requirement which may result in further delay or decreased likelihood of collection. Payers may attempt to recoup prior payments after review, sometimes after significant time has passed, which would impact future revenue.

We expect to continue to focus substantial resources on increasing adoption, coverage and reimbursement for the Afirma, Percepta, and Envisia classifiers, ~~the Percepta classifier, launched in April 2015,~~Prosigna and ~~the Envisia classifier, launched in October 2016, as well as~~ any other future tests we may develop. We believe it will take several years to achieve coverage and contracted reimbursement with a majority of third-party payers. However, we cannot predict whether, under what circumstances, or at what payment levels payers will reimburse for our tests. Also, payer consolidation is underway and creates uncertainty as to whether coverage and contracts with existing payers will remain in effect. Finally, if there is a decrease in the Medicare payment rates for our tests, the payment rates for some of our commercial payers may also decrease if they tie their allowable rates to the Medicare rates. Reductions in private payer amounts could decrease the Medicare payment rates ~~and should Medicare reduce their rates as they did with the Afirma test in September 2016, we may be negatively impacted.~~for our tests under PAMA. Our failure to establish broad adoption of and reimbursement for our tests, or our inability to maintain existing reimbursement from payers, will negatively impact our ability to generate revenue and achieve profitability, as well as our future prospects and our business.

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

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

Moreover, many patients have been deferring elective procedures and medical visits as a result of the COVID-19 pandemic, and we have experienced, and expect to continue to experience, a significant reduction in patient demand or physician recommendations, which has and may continue to adversely affect our business.

The Afirma genomic classifier is included in most physician practice guidelines in the United States for the assessment of patients with thyroid nodules. However, historical practice recommended a full or partial thyroidectomy in cases where cytopathology results were indeterminate to confirm a diagnosis. Our lung products are not yet integrated into practice guidelines and physicians may be reluctant to order tests that are not recommended in these guidelines. The Prosigna test is included in practice guidelines in the United States and internationally but faces competition from other products. Because our ~~diagnostic~~Afirma, Percepta and Envisia testing services are performed by our certified laboratory under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, rather than by the local laboratory or pathology practice, pathologists may be reluctant to support our testing services as well. Guidelines that include our ~~classifiers~~tests currently may subsequently be revised to recommend another testing protocol, and these changes may result in physicians deciding not to use our tests. Lack of guideline inclusion could limit the adoption of our tests and our ability to generate revenue and achieve profitability. To the extent international markets have existing practices and standards of care that are different than those in the United States, we may face challenges with the adoption of our tests in international markets.

We may experience limits on our revenue if patients decide not to use our tests.

Some patients may decide not to use our tests because of price, all or part of which may be payable directly by the patient if the patient’s insurer denies reimbursement in full or in part. There is a growing trend among insurers to shift more of the cost of healthcare to patients in the form of higher co-payments or premiums, and this trend is accelerating which puts patients in the position of having to pay more for our tests. We expect to continue to see pressure from payers to limit the utilization of tests, generally, and we believe more payers are deploying costs containment tactics, such as pre-authorization and employing laboratory benefit managers to reduce utilization rates. Implementation of provisions of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively the ACA, has also resulted in increases in premiums and reductions in coverage for some patients. In addition, judicial challenges to and Congressional efforts to repeal the ACA could result in an increase in uninsured patients. These events may result in patients delaying or forgoing medical checkups or treatment due to their inability to pay for our tests, which could have an adverse effect on our revenue. Many patients have been deferring elective procedures and medical visits as a result of the COVID-19 pandemic, and we have experienced, and may continue to experience, a significant reduction in patient demand, which has and may continue to adversely affect our business.

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

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

We are also required to maintain state licenses to conduct testing in our laboratories. California, New York, and Texas, among other states’ laws, require that we maintain a license and comply with state regulation as a clinical laboratory. Other states may have similar requirements or may adopt similar requirements in the future. In addition, both of our clinical laboratories are required to be licensed on a test-specific basis by New York State. We have received approval for the Afirma, Percepta and Envisia tests. We will be required to obtain approval for other tests we may offer in the future. If we were to lose our CLIA certificate or California license for our South San Francisco laboratory, whether as a result of revocation, suspension or limitation, we would no longer be able to perform our molecular tests, which would eliminate our primary source of revenue and harm our business. If we fail to meet the state licensing requirements for our Austin laboratory, we would need to move the receipt and storage of FNAs, as well as the slide preparation for cytopathology, to South San Francisco, which could result in a delay in processing tests during that transition and increased costs. If we were to lose our licenses issued by New York or by other states where we are required to hold licenses, we would not be able to test specimens from those states. New tests we may develop may be subject to new approvals by regulatory bodies such as New York State, and we may not be able to offer our new tests until such approvals are received.

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If we are not successful in integrating the assets acquired from NanoString or if our general strategy of seeking growth through such acquisitions and collaborations is not successful, our prospects and financial condition will suffer.

We have recently acquired assets, such as the nCounter Analysis System and Prosigna in December 2019, and we may pursue additional acquisitions of complementary businesses or assets as part of our business strategy. To date, we have limited experience with respect to acquisitions and the formation of strategic alliances and joint ventures. There can be no assurance that we will successfully integrate the assets acquired from NanoString successfully into our existing business, or that our exclusive worldwide license to the nCounter system for in vitro diagnostic use will allow us to expand our international reach as anticipated. This and any future acquisitions made by us also could result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could harm our operating results. Integration of acquired companies or businesses we may acquire in the future also may require management resources that otherwise would be available for ongoing development of our existing business. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any acquisition, technology license, strategic alliance, joint venture or investment.

To finance any acquisitions or investments, we have previously issued and may choose in the future to issue shares of our stock as consideration, which would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other companies for stock. Alternatively, it may be necessary for us to raise additional funds for these activities through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all. If these funds are raised through the sale of equity or convertible debt securities, dilution to our stockholders could result. Our Loan and Security Agreement with Silicon Valley Bank contains covenants that could limit our ability to sell debt securities or obtain additional debt financing arrangements, which could affect our ability to finance acquisitions or investments other than through the issuance of stock.

If we are not successful in advancing our collaborations with Johnson & Johnson and others, or if our general strategy of seeking growth through such collaborations is not successful, our prospects and financial condition will suffer.

We have previously entered into technology licensing and collaboration arrangements, such as our collaboration with Johnson & Johnson in December 2018 and with Acerta Pharma, the hematology research and development arm of AstraZeneca, in December 2019, reflecting important elements of our business strategy. We also may pursue additional strategic alliances that leverage our core technology and industry experience to expand our offerings or distribution, or make investments in other companies. However, we have limited experience with respect to the formation of strategic alliances and joint ventures. There can be no assurance that we will successfully identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any technology license, strategic alliance, joint venture or investment.

We rely on sole suppliers for some of the reagents, equipment, chips and other materials used to perform our tests, and we may not be able to find replacements or transition to alternative suppliers.

We rely on sole suppliers for critical supply of reagents, equipment, chips and other materials that we use to perform our tests and for the manufacture of the nCounter systems for diagnostic use and Prosigna test kits sold to customers. We also purchase components used in our sample collection kits from sole-source suppliers. Some of these items are unique to these suppliers and vendors. In addition, we utilize a sole source to assemble and distribute our sample collection kits. We rely on NanoString for the supply of the nCounter systems for diagnostic use and Prosigna test kits. While we have developed alternate sourcing strategies for these materials and vendors, we cannot be certain whether these strategies will be effective or the alternative sources will be available when we need them. Moreover, the supply of key reagents and testing materials has been severely challenged by the COVID-19 pandemic. In October 2020, we experienced supply chain disruptions in the supply of plastic materials used in the processing of samples, although this has not resulted in delays in our ability to timely return test results. If these suppliers can no longer provide us with the materials we need to perform the tests and for our sample collection kits, if the materials do not meet our quality specifications or are otherwise unusable, if we cannot obtain acceptable substitute materials, or if we elect to change suppliers, an interruption in test processing or system and test kit deliveries could occur, we may not be able to deliver patient reports and we may incur higher one-time switching costs. Any such interruption may significantly affect our future revenue, cause us to incur higher costs, and harm our customer relationships and reputation. In addition, in order to mitigate these risks, we maintain inventories of these supplies at higher levels than would be the case if multiple sources of supplies were available. If our test volume decreases or we switch suppliers, we may hold excess supplies with expiration dates that occur before use which would adversely affect our losses and cash flow position. As we introduce any new test, we may experience supply issues as we ramp test volume. Moreover, the COVID-19 pandemic has disrupted supply chains globally, and could adversely affect our ability to source essential reagents, equipment, chips and other materials in a timely manner or at all.

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We depend on a specialized cytopathology practice to perform the cytopathology component of our Afirma test, and our ability to perform our diagnostic solution would be harmed if we were required to secure a replacement.

We rely on Thyroid Cytopathology Partners, or TCP, to provide cytopathology professional diagnoses on thyroid FNA samples pursuant to a pathology services agreement. Pursuant to this agreement, as amended, TCP has the exclusive right to provide our cytopathology diagnoses on FNA samples at a fixed price per test. Until February 2019, TCP also previously subleased a portion of our facility in Austin, Texas. Our agreement with TCP is effective through October 31, 2022, and thereafter automatically renews every year unless either party provides notice of intent not to renew at least 12 months prior to the end of the then-current term.

If TCP were not able to support our current test volume or future increases in test volume or to provide the quality of services we require, or if we were unable to agree on commercial terms and our relationship with TCP were to terminate, our business would be harmed until we were able to secure the services of another cytopathology provider. There can be no assurance that we would be successful in finding a replacement that would be able to conduct cytopathology diagnoses at the same volume or with the same high-quality results as TCP. Locating another suitable cytopathology provider could be time consuming and would result in delays in processing Afirma tests until a replacement was fully integrated with our test processing operations.

Due to how we recognize revenue, our quarterly operating results are likely to fluctuate.

For tests performed where we have an agreed upon reimbursement rate or we are able to reasonably estimate the amount that will ultimately be realized at the time delivery of a patient report is complete, such as in the case of Medicare and certain other payers, we

We recognize ~~the related~~test revenue upon delivery of the patient report to the prescribing physician based on the amount we expect to ultimately realize. We determine the amount we expect to ultimately realize based on ~~a per~~ payer ~~per contract or agreement basis. In the first period in which revenue is accrued for a particular payer, a one-time increase in revenue generally occurs.~~reimbursement history, contracts, and coverage. Upon ultimate collection, the amount received ~~where reimbursement was estimated~~ is compared to ~~previous~~the estimates and the amount accrued is adjusted accordingly. ~~In situations where we cannot reasonably estimate the amount that will ultimately be collected, we recognize revenue on the cash basis.~~ We cannot be certain as to when we will receive payment for our diagnostic tests, and we must appeal negative payment decisions, which delays collections. Should ~~we recognize revenue from payers on an accrual basis and later determine the~~ judgments underlying estimated reimbursement change or ~~were~~be incorrect at the time we accrued such revenue, our financial results could be negatively impacted in future quarters. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. In addition, these fluctuations in revenue may make it difficult for us, for research analysts and for investors to accurately forecast our revenue and operating results. If our revenue or operating results fall below expectations, the price of our common stock would likely decline.

We ~~rely on sole suppliers for some of~~may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.

In addition to the ~~reagents, equipment, chips and other materials used~~need to ~~perform~~scale our ~~tests, and we may not be able to find replacements or~~testing capacity, future growth, including our transition to ~~alternative suppliers.~~

~~We rely~~a multi-product company with international operations, will impose significant added responsibilities on ~~sole suppliers for critical supply of reagents, equipment, chips~~management, including the need to identify, recruit, train and other materials that we use to perform our tests. We also purchase components used in our collection kits from sole-source suppliers. Some of these items are unique to these suppliers and vendors. In addition, we utilize a sole source to assemble and distribute our sample collection kits. While we have developed alternate sourcing strategies for these materials and vendors, we cannot be certain whether these strategies will be effective or the alternative sources will be available when we need them. If these suppliers can no longer provide usintegrate additional employees with the ~~materials we need~~necessary skills to ~~perform~~support the ~~tests~~growing complexities of our business. Rapid and ~~for~~significant growth may place strain on our ~~collection kits, if the materials do not meet~~administrative, financial and operational infrastructure. Our ability to manage our ~~quality specifications or are otherwise unusable, if we cannot obtain acceptable substitute materials, or if we elect~~business and growth will require us to ~~change suppliers,~~continue to improve our operational, financial and management controls, reporting systems and procedures. We have implemented an ~~interruption in test processing could occur, we may not be able~~internally-developed data warehouse, which is critical to ~~deliver~~our ability to track our diagnostic services and patient reports delivered to physicians, as well as to support our financial reporting systems. The time and ~~we may incur higher one-time switching costs. Any such interruption may significantly affect our future revenue, cause us~~resources required to ~~incur higher costs,~~optimize these systems is uncertain, and ~~harm our customer relationships~~failure to complete optimization in a timely and reputation. In addition, in order to mitigate these risks, we maintain inventories of these supplies at higher levels than would be the case if multiple sources of supply were available. If our test volume decreases or we switch suppliers, we may hold excess inventory with expiration dates that occur before use which wouldefficient manner could adversely affect our ~~losses and cash flow position. As~~operations. If we ~~introduce any new test, we~~are unable to manage our growth effectively, it may ~~experience supply issues as we ramp test volume.~~

~~We depend on a specialized cytopathology practice~~be difficult for us to ~~perform the cytopathology component of~~execute our ~~Afirma test,~~business strategy and our ~~ability to perform our diagnostic solution would be harmed if we were required to secure a replacement.~~

We rely on Thyroid Cytopathology Partners, P.A., or TCP, to provide cytopathology professional diagnoses on thyroid fine needle aspiration, or FNA, samples pursuant to a pathology services agreement. Pursuant to this agreement, TCP has the exclusive right to provide the cytopathology diagnoses on FNA samples at a fixed price per test. We have also agreed to allow TCP to co-locate in a portion of our facilities in Austin, Texas. Our agreement with TCP is effective through October 31, 2022, and thereafter automatically renews every year unless either party provides notice of intent not to renew at least 12 months prior to the end of the then-current term.

business would be harmed until we were able to secure the services of another cytopathology provider. There can be no assurance that we would be successful in finding a replacement that would be able to conduct cytopathology diagnoses at the same volume or with the same high-quality results as TCP. Locating another suitable cytopathology provider could be ~~time consuming and would result in delays in processing Afirma tests until a replacement was fully integrated with our test processing operations.~~harmed.

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If we are unable to support demand for our commercial tests, our business could suffer.

As demand for our tests grows, we will need to continue to scale our testing capacity and processing technology, expand customer service, billing and systems processes and enhance our internal quality assurance program. We will also need additional certified laboratory scientists and other scientific and technical personnel to process higher volumes of our tests. We cannot assure you that any increases in scale, related improvements and quality assurance will be successfully implemented or that appropriate personnel will be available. Failure to implement necessary procedures, transition to new processes or hire the necessary personnel could result in higher costs of processing tests, quality control issues or inability to meet demand. There can be no assurance that we will be able to perform our testing on a timely basis at a level consistent with demand, or that our efforts to scale our operations will not negatively affect the quality of test results. If we encounter difficulty meeting market demand or quality standards, our reputation could be harmed and our future prospects and our business could suffer.

Changes in healthcare policy, including legislation reforming the U.S. healthcare system, may have a material adverse effect on our financial condition and operations.

The ~~Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, collectively the~~ ACA, enacted in March 2010, made changes that significantly affected the pharmaceutical and medical device industries and clinical laboratories. ~~Effective January 1, 2013,~~Along with the ~~ACA included a~~now-repealed 2.3% excise tax on the sale of certain medical devices sold outside of the retail ~~setting. Although a moratorium has been imposed on this excise tax for 2016 and 2017, the excise tax is scheduled to be restored in 2018.~~

~~Other~~setting, other significant measures contained in the ACA include, for example, coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. The ACA also includes significant new fraud and abuse measures, including required disclosures of financial arrangements with physician customers, lower thresholds for violations and increasing potential penalties for such violations. In addition, the ACA establishes an Independent Payment Advisory Board, or IPAB, to reduce the per capita rate of growth in Medicare spending. The IPAB has broad discretion to propose policies to reduce expenditures, which may have a negative effect on payment rates for services. The IPAB proposals could have affected payments for clinical laboratory services beginning in 2016 and may affect those for hospital services beginning in 2020. We are monitoring the effect of the ACA to determine the trends and changes that may be necessitated by the legislation, any of which may potentially affect our business.

In the beginning of 2017, the U.S. Congress and the Administration took actions to repeal the ACA and indicated an intent to replace it with another act and efforts to challenge, repeal or amend the ACA are ongoing. We cannot predict if, or when, the ACA will be repealed or amended, and cannot ~~quantify~~predict the ~~effect~~impact that an amendment or repeal of ~~new legislation~~the ACA will have on our business.

In addition to the ACA, various healthcare reform proposals have also periodically emerged from federal and state governments. For example, in February 2012, Congress passed the Middle Class Tax Relief and Job Creation Act of 2012, which in part reset the clinical laboratory payment rates on the Medicare Clinical Laboratory Fee Schedule, or CLFS, by 2% in 2013. In addition, under the Budget Control Act of 2011, which is effective for dates of service on or after April 1, 2013, Medicare payments, including payments to clinical laboratories, are subject to a reduction of 2% due to the automatic expense reductions (sequester) until fiscal year 2024. In March 2020, Congress passed the CARES Act, which suspended the 2% reduction in Medicare fee-for-service payments from May 1, 2020 through December 31, 2020. To account for this temporary suspension, the legislation also extends the effect of sequestration by a year (now through fiscal year 2030). Reductions resulting from the Congressional sequester are applied to total claims payment made; however, they do not currently result in a rebasing of the negotiated or established Medicare or Medicaid reimbursement rates.

State legislation on reimbursement applies to Medicaid reimbursement and managed Medicaid reimbursement rates within that state. Some states have passed or proposed legislation that would revise the reimbursement methodology for clinical laboratory payment rates under those Medicaid programs. For example, effective July 2015, California’s Department of Health Care Services implemented a new rate methodology for clinical laboratories and laboratory services. This methodology involves the use of a range of rates that fell between zero and 80% of the calculated California-specific Medicare rate and the calculation of a weighted average (based on units billed) of such rates.

We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do business, or the effect any future legislation or regulation will have on us. The taxes imposed by the new federal legislation, cost reduction measures and the expansion in the role of the U.S. government in the healthcare industry may result in decreased revenue, lower reimbursement by payers for our tests or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations. In addition, sales of our tests outside the United States subject our business to foreign regulatory requirements and cost-reduction measures, which may also change over time.

Ongoing calls for deficit reduction at the federal government level and reforms to programs such as the Medicare program to pay for such reductions may affect the pharmaceutical, medical device and clinical laboratory industries. Currently, clinical laboratory services are excluded from the Medicare Part B co-insurance and co-payment as preventative services. Any requirement for clinical laboratories to collect co-payments from patients may increase our costs and reduce the amount ultimately collected.

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CMS ~~announced plans to bundle~~bundles payments for clinical laboratory diagnostic tests together with other services performed during hospital outpatient visits under the Hospital Outpatient Prospective Payment System. ~~For calendar year 2016,~~ CMS ~~maintained~~currently maintains an exemption for molecular pathology tests from this bundling provision. It is possible that this exemption could be removed by CMS in future rule making, which might result in lower reimbursement for tests performed in this setting.

~~The Protecting Access to Medicare Act of 2014, or~~

PAMA includes a substantial new payment system for clinical laboratory tests under the CLFS. Under PAMA, laboratories that receive the majority of their Medicare revenues from payments made under the CLFS and the Physician Fee Schedule would report ~~initially and then~~ on ~~a subsequent three year basis thereafter~~triennial bases (or annually for advanced diagnostic laboratory tests, or ADLTs), private payer ~~payment~~ rates and volumes for their ~~tests. The private payer rate will be calculated~~tests with specific CPT codes based on ~~claims whose adjudication is~~ final ~~and will include patient deductible and co-insurance amounts. The new market based rates are scheduled to take effect~~payments made during a set data collection period (the first of which was January 1 ~~2018.~~through June 30, 2016). We believe that ~~the final~~ PAMA and its implementing regulations are generally favorable to us. We ~~submitted~~reported to CMS the ~~Afirma genomic classifier~~ data required under PAMA before the March 31, 2017 deadline. ~~On September 25, 2017, CMS published the preliminary 2018 rates for clinical diagnostic laboratory tests, with the reimbursement~~The new payment rate for the Afirma genomic classifier ~~expected to increase~~based on the volume-weighted median of private payer rates took effect January 1, 2018, increasing from $3,220 to $3,600 through December 31, 2020. In December 2019, through the Further Consolidated Appropriations Act of 2020, Congress delayed the next data reporting period from 2020 to 2021 for ~~calendar year 2018. The CMS plans~~final payments made between January 1 and June 30, 2019, extending the applicability of the current rate for Afirma through December 31, 2021. In March 2020, through the CARES Act, Congress further delayed the next reporting period to ~~finalize~~2022 for final payments made between January 1 and June 30, 2019, extending the applicability of the payment rates based on 2017 reporting through December 31, 2022. We expect the weighted median of these rates to set the payment rate for the Afirma classifier from January 1, 2023 through December 31, 2025. There can be no assurance that the payment rate for Afirma or Prosigna will not decrease in ~~November 2017. Additionally, we believe our Afirma genomic classifier as well as our~~the future or that the payment rates for Percepta ~~and~~or Envisia ~~classifiers would be considered ADLTs and that we can determine when to seek ADLT status. We cannot assure you that reimbursement rates under the final regulations for tests like ours~~ will not be adversely ~~affected.~~

affected by the PAMA law and regulations.

Our Envisia classifier was approved by CMS as a New ADLT on September 17, 2020. The initial payment rate (for a period not to exceed nine months) under PAMA for a new ADLT (an ADLT for which payment has not been made under the CLFS prior to January 1, 2018) will be set at the “actual list charge” for the test as reported by the laboratory. Insofar as the actual list charge substantially exceeds private payer rates (by more than 30%), CMS will have the ability to recoup excess payments made during the initial nine-month payment period. We can determine whether to seek ADLT status for our tests, but there can be no assurance that our tests will be designated ADLTs or that the payment rates for our tests will not be adversely affected by such designation.

There have also been recent and substantial changes to the payment structure for physicians, including those passed as part of the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, which was signed into law on April 16, 2015. MACRA created the Merit-Based Incentive Payment System which, beginning in 2019, more closely aligns physician payments with composite performance on performance metrics similar to three existing incentive programs (i.e., the Physician Quality Reporting System, the Value-based modifier program and the Electronic Health Record Meaningful Use program) and incentivizes physicians to enroll in alternative payment methods. At this time, we do not know whether these changes to the physician payment systems will have any impact on orders or payments for our tests.

In December 2016, Congress passed the 21st Century Cures Act, which, among other things, revised the process for LCDs. Additionally, effective June 11, 2017, a MAC is required to, among other things, publish a summary of the evidence that it considered when developing an LCD, including a list of sources, and an explanation of the rationale that supports the MAC’s determinations. In October 2018, CMS issued additional guidance revising the requirements for the development of LCDs. We cannot predict whether these revisions will delay future LCDs and result in impeded coverage for our test products, which could have a material negative impact on revenue.

Congress is considering legislation to limit balance billing of patients who receive services from out-of-network providers (including laboratories) at in-network facilities and to set a methodology for payment of the out-of-network provider in such circumstances. This legislation, if enacted, could limit our ability to achieve payment in full for our testing services.

Because of Medicare billing rules, we may not receive reimbursement for all tests provided to Medicare patients.

Under ~~current~~previous Medicare billing rules, ~~payment~~hospitals were required to bill for our tests when performed on Medicare beneficiaries who were hospital ~~inpatients~~outpatients at the time ~~the~~of tissue ~~samples were obtained and whose~~specimen collection when these tests were ordered less than 14 days from discharge must be bundled into the payment that the hospital receives for the inpatient services provided. Medicare billing rules also require hospitals to bill for our tests when ordered for hospital outpatients less than 14 days following the date of the ~~hospital procedure where the tissue samples were obtained. Accordingly, we are required~~patient's discharge.

Effective January 1, 2018, CMS revised its billing rules to ~~bill individual hospitals for tests performed on Medicare beneficiaries during these time frames. We cannot ensure that hospitals will pay us for tests performed that fall under these rules.~~

~~Revisions to the rule proposed in July 2017 would~~ allow the performing laboratory to bill Medicare directly for ~~certain~~molecular pathology tests performed on ~~tissue samples~~specimens collected from hospital outpatients, even when those tests are ordered less than 14 days after the date of ~~tissue collection.~~discharge, if certain conditions are met. We believe that our Afirma, Percepta, and Envisia classifiers, along with Prosigna, should be covered by this policy. Accordingly, we bill Medicare for these tests when we perform them on specimens collected from hospital outpatients and meet the conditions set forth in CMS's revised billing rules.

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This change does not apply to tests performed on specimens collected from hospital inpatients. We will continue to bill hospitals for tests performed on specimens collected from hospital inpatients when the test was ordered less than 14 days after the date of discharge.

In the CY 2020 Hospital Outpatient Prospective Payment System Proposed Rule, CMS is expected to announce the adoption of these proposed revisions and changes to this billing policy later in 2017 and, if adopted, these changes could go into effect as early as January 1, 2018. To the extentsolicited comments on potential revisions to ~~the~~these billing ~~policy would permit us~~rules that could have impacted our ability to bill Medicare directly for ~~tests previously required to be billed to hospitals, we would no longer bill hospitals~~our Afirma, Percepta, and Envisia classifiers, as well as for ~~such tests. While we believe the impact of~~Prosigna, when performed on specimens collected from hospital outpatients. Although these ~~proposed revisions,~~changes were not finalized, if ~~enacted, would be favorable to us, we cannot predict with certainty the potential impact on our business.~~ CMS ~~may change this regulatory policy~~makes similar changes in the future, ~~which~~it could negatively impact our business.

In addition, we must maintain CLIA compliance and certification to sell our tests and be eligible to bill for diagnostic services provided to Medicare beneficiaries.

If the FDA were to begin regulating those of our tests that are not currently regulated, we could incur substantial costs and delays associated with trying to obtain premarket clearance or approval.

Clinical laboratory tests have long been subject to comprehensive regulations under CLIA, as well as by applicable state laws. Most laboratory developed tests, or LDTs, are not currently subject to regulation byunder the ~~U.S. Food and Drug Administration, or FDA,~~FDA's enforcement discretion policy, although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject to regulation. While the FDA maintains its authority to regulate LDTs, it has chosen to exercise its enforcement discretion not to ~~regulate LDTs as~~enforce the premarket review and other applicable medical ~~devices.~~device requirements for LDTs. We believe that the Afirma, Percepta and Envisia classifiers are ~~LDTs.~~LDTs that fall under the FDA's enforcement discretion policy. In October 2014, the FDA issued draft guidance, entitled "Framework for Regulatory Oversight of LDTs," proposing ~~the~~a risk-based framework of oversight and a phased-in enforcement of premarket review requirements for most LDTs. ~~The framework is similar to previously issued guidance. There is no timeframe in which~~In 2016, the FDA ~~must issue final guidance documents. If~~announced that it would not be finalizing the ~~guidance were enacted, our tests could be required to comply with FDA regulations applicable to medical devices.~~

guidance.

In January 2017, the FDA issued a ~~“Discussion~~"Discussion Paper on Laboratory Developed ~~Tests”~~Tests" following input it received from multiple stakeholders who had commented on its 2014 draft guidance. ~~While the~~The FDA specifically states in its Discussion Paper that ~~it does~~the proposals contained in the document do not represent a final version of the LDT draft guidance documents ~~that were published in 2014, it is~~and are only designed to provide a possible approach to spark further dialogue. The suggested LDT framework could grandfather many types of LDTs without

requiring new premarket review or quality management requirements but would subject some grandfathered tests to adverse event and malfunction reporting requirements. It also suggests a four-year phased implementation of ~~market authorization~~the premarket review requirements for some types of tests.

In a December 2018 statement, the FDA said that there is a need for “a unified approach to the regulation of in vitro clinical tests to protect patient safety, support innovation, and keep pace with the rapidly evolving technology that’s helping us find new treatments for disease.” The FDA listed key principles of an approach it would support.

In March 2017, a draft bill ~~titled~~on the regulation of LDTs, entitled "The Diagnostics Accuracy and Innovation Act", or DAIA, was released for discussion. In December 2018, the sponsors of DAIA released a new version of the legislation called the “Verifying Accurate, Leading-edge IVCT Development Act, or VALID Act. The ~~bill~~VALID Act proposes a risk-based approach to regulate LDTs and creates a new in vitro clinical test category, which includes LDTs, and a regulatory structure under the FDA. As proposed, the bill ~~grandfathers~~would create a precertification program for lower risk tests not otherwise required to go through premarket review. It would grandfather existing tests ~~and gives companies five years~~but would allow the FDA to ~~augment test development pipelines~~subject otherwise grandfathered tests to ~~ensure new tests have the data necessary for FDA approval.~~premarket review under certain conditions. We cannot predict ifwhether this draft bill will become legislation and cannot quantify the effect of this draft bill on our business.

The Department of Health and Human Services, or HHS, recently issued a public statement purporting to rescind FDA’s policies regarding the premarket review of LDTs. According to the HHS statement, FDA will not require premarket review of LDTs unless it first engages in notice-and-comment rulemaking. There is no guarantee, however, that the HHS statement will not be revised, that legislation reforming the federal government’s regulation of LDTs will not be passed, or that LDTs will otherwise continue to be able to operate without first receiving FDA premarket review.

If the FDA were to require us to seek clearance or approval for our existing tests or any of our future products for clinical use, we may not be able to obtain such approvals on a timely basis, or at all. While we believe our ~~current tests~~Afirma, Percepta and Envisia classifiers would likely qualify for the “grandfathered” tests treatment, there can be no assurance of what the FDA might ultimately require if it ~~issued final guidance.~~issues a rule. If premarket reviews ~~were~~are required, our business could be negatively impacted if we ~~were~~are required to stop selling our products pending their clearance or approval. In addition, the launch of any new products that we develop could be delayed by the implementation of future FDA ~~guidance.~~regulations. The cost of complying with premarket review requirements, including obtaining clinical data, could be significant. In addition, future regulation by the FDA could subject our business to further regulatory risks and costs. Failure to comply with applicable regulatory requirements of the FDA could result in enforcement action, including receiving untitled or warning letters, fines, injunctions, or civil or criminal penalties. Any such enforcement action would have a material adverse effect on our business, financial condition and operations. In addition, our sample collection containers are listed as Class I devices with the FDA. If the FDA were to determine that they are not Class I devices, we would be required to file 510(k) applications and obtain FDA clearance to use the containers, which could be time consuming and expensive.

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Some of the materials we use for our tests and that we may use for future tests are labeled for ~~research use only.~~research-use only, or RUO, or investigational-use only, or IUO. In November 2013, the FDA finalized guidance regarding the sale and use of products labeled ~~for research~~RUO or ~~investigational-use only.~~IUO. Among other things, the guidance advises that the FDA continues to be concerned about distribution of research or investigational-use only products intended for clinical diagnostic use and that the manufacturer’s objective intent for the product’s intended use will be determined by examining the totality of circumstances, including advertising, instructions for clinical interpretation, presentations that describe clinical use, and specialized technical support, surrounding the distribution of the product in question. The FDA has advised that if evidence demonstrates that a product is inappropriately labeled for research or investigational-use only, the device would be considered misbranded and adulterated within the meaning of the Federal Food, Drug and Cosmetic Act. Some of the reagents, instruments, software or components obtained by us from suppliers for use in our products are currently labeled as ~~research~~RUO or ~~investigational-use only products.~~IUO. If the FDA were to determine that any of these reagents, instruments, software or components are improperly labeled RUO or IUO and undertake enforcement actions, some of our suppliers might cease selling ~~research~~these reagents, instruments, software or ~~investigational-use only products~~components to us, and any failure to obtain an acceptable substitute could significantly and adversely affect our business, financial condition and results of operations, including increasing the cost of testing or delaying, limiting or prohibiting the purchase of reagents, instruments, software or components necessary to perform testing.

Obtaining marketing authorization by the FDA and foreign regulatory authorities for our diagnostic tests will take significant time and require significant research, development and clinical study expenditures and ultimately may not succeed.

Before we begin to label and market some of our products for use as clinical diagnostics in the United States, unless an exemption applies, we are required to obtain clearance from the FDA by submitting a premarket notification under section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FDC Act, or 510(k), or approval from the FDA by submitting a premarket approval, or PMA. We may also be able to obtain marketing authorization through a De Novo classification process rather than through a PMA if the 510(k) pathway is not available. In September 2013, Prosigna obtained FDA 510(k) clearance as a prognostic indicator for distant recurrence-free survival at ten years in post-menopausal women with Stage I/II lymph node-negative or Stage II lymph node-positive (1-3 positive nodes), hormone receptor-positive breast cancer to be treated with adjuvant endocrine therapy alone, when used in conjunction with other clinicopathological factors after they have undergone surgery in conjunction with locoregional treatment and consistent with the standard of care.

In August 2014, the FDA issued a final guidance document titled In Vitro Companion Diagnostic Devices. In the guidance, the FDA defined an IVD companion diagnostic device as an in vitro diagnostic device that provides information that is essential for the safe and effective use of a corresponding therapeutic product. The use of an IVD companion diagnostic device with a therapeutic product is stipulated in the instructions for use in the labeling of both the diagnostic device and the corresponding therapeutic product, including the labeling of any generic equivalents of the therapeutic product. The FDA stated that an IVD companion diagnostic should be submitted for review and approved or cleared through an appropriate device submission contemporaneously with the review and approval of the therapeutic product to facilitate concurrent review. The FDA guidance also stated that while there may be cases when a companion diagnostic could come to market through the 510(k) pathway, the FDA expects that most companion diagnostics will be Class III devices. Class III devices generally require the approval of a PMA before they can be marketed. An IVD diagnostic device that is not a companion diagnostic device because it is not essential for the safe and effective use of a corresponding therapeutic product, may still be beneficial for use with a therapeutic product but may not be identified in the labeling of the therapeutic product. It is possible that revenue from a cleared or approved beneficial or complementary IVD diagnostic device may be less than revenue from a cleared or approved IVD companion diagnostic device.

In July 2016, the FDA issued guidance pertaining to the co-development of companion diagnostic tests with a therapeutic product. The FDA explained that while it supports contemporaneous marketing authorizations, if there are any deficiencies in the submissions, the FDA may place a PMA review of a companion diagnostic on hold or request additional testing, which could potentially delay the approval of the corresponding new drug application or the marketing authorization of the companion diagnostic or otherwise complicate the review process. The FDA issued another draft guidance in December 2018 specific to oncology companion diagnostic tests, which it finalized in April 2020. The guidance explained that some oncology companion diagnostic tests can be developed in a way that results in labeling for a specific group of oncology therapeutic products, rather than a single therapeutic product. However, there is no assurance that we would be able to obtain clearance or approval for any of our diagnostic devices in development as a companion diagnostic device or that any such clearance or approval will occur without significant delay.

Any marketing authorization we obtain for any future device product would be subject to regulatory requirements that would affect how we are able to market and sell the device. The FDC Act and FDA regulations place considerable requirements on our products, including, but not limited to, compliance with the quality system regulations, or QSR, establishment registration and product listing with the FDA, and compliance with labeling, marketing, complaint handling, medical device reporting requirements, and reporting certain corrections and removals. Obtaining FDA clearance or approval for diagnostics can be expensive and uncertain, generally may take several months to several years, and generally requires detailed and comprehensive scientific and clinical data, as well as compliance with FDA regulations for investigational devices. In addition, we have limited experience in obtaining PMA approval from the FDA and are therefore supplementing our operational capabilities to manage the more complex processes needed to obtain and maintain PMAs. Notwithstanding the expense, these efforts may never result in FDA clearance or approval. Even if we were to obtain marketing authorization, it may not be for the uses we believe are important or commercially attractive, in which case we would not market our product for those uses.

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Sales of our diagnostic products outside the United States are subject to foreign regulatory requirements governing clinical studies, vigilance reporting, marketing approval, manufacturing, regulatory inspections, product licensing, pricing and reimbursement. These regulatory requirements vary greatly from country to country. As a result, the time required to obtain approvals outside the United States may differ from that required to obtain FDA marketing authorization, and we may not be able to obtain foreign regulatory approvals on a timely basis or at all. Marketing authorization from the FDA does not ensure approval by regulatory authorities in other countries, and approval by any foreign regulatory authority does not ensure marketing authorization by regulatory authorities in other countries or by the FDA. Foreign regulatory authorities could require additional testing beyond what the FDA requires. In addition, the FDC Act imposes requirements on the export of medical devices, such as labeling requirements, and foreign governments impose requirements on the import of medical devices from the United States. Failure to comply with these regulatory requirements or to obtain required approvals, clearances, and export certifications could impair our ability to commercialize our diagnostic products outside of the United States.

If we are unable to obtain marketing authorizations to market Prosigna in additional countries or if regulatory limitations are placed on our diagnostic kit products, our business and growth will be harmed.

The FDA cleared the Prosigna test for marketing in the United States; Prosigna also has a CE mark which permits us to market the test in the European Union; and Prosigna received marketing authorizations in selected other jurisdictions. We intend to seek regulatory authorizations for Prosigna in other jurisdictions and, potentially, for other indications.

In addition, pursuant to our collaborations with pharmaceutical companies for the development of companion diagnostic tests for use with their drugs, we are responsible for obtaining regulatory authorizations to use the companion diagnostic tests in clinical trials as well as the marketing authorizations to sell the companion diagnostic tests following completion of such trials. Some of the compensation we expect to receive pursuant to these collaborations is based on the receipt of marketing authorizations. Any failure to obtain marketing authorizations for our diagnostic kits in a particular jurisdiction may also reduce sales of our nCounter systems for clinical use in that jurisdiction, as the lack of a robust menu of available diagnostic tests would make those systems less attractive to testing laboratories.

We cannot assure investors that we will be successful in obtaining regulatory clearances, approvals, or marketing authorizations. If we do not obtain regulatory clearances, approvals, or marketing authorizations for future diagnostic kit products or expand future indications for diagnostic purposes, if additional regulatory limitations are placed on our diagnostic kit products or if we fail to successfully commercialize such products, the market potential for our diagnostic kit products would be constrained, and our business and growth prospects would be adversely affected.

We are subject to ongoing and extensive regulatory requirements, and our failure to comply with these requirements could substantially harm our business.

Certain of our products are regulated as in vitro diagnostic medical devices, including Prosigna and the nCounter Analysis System. Accordingly, we and certain of our contract manufacturers are subject to ongoing International Organization for Standardization, or ISO, obligations as well as requirements under the FDC Act and device regulations enforced by the FDA and other statutory and regulatory requirements enforced by other government authorities. These may include routine inspections by Notified Bodies, FDA, and other health authorities, of our manufacturing facilities and our records for compliance with standards such as ISO 13485 and QSR regulations, which establish extensive requirements for quality assurance and control as well as manufacturing and change control procedures, among other things. These inspections may include the manufacturing facilities of any suppliers. In the event that a supplier fails to maintain compliance with regulatory or our quality requirements, we may have to qualify a new supplier and could experience manufacturing delays as a result. We are also subject to other regulatory obligations, such as registration of our company offices and facilities and the listing of our devices with the FDA; continued adverse event and malfunction reporting; reporting certain corrections and removals; and labeling and promotional requirements.

Other regulatory bodies may also issue guidelines and regulations that could impact the development of our products, including companion diagnostic tests. For example, the European Medicines Agency, a European Union agency which is responsible for the scientific evaluation of medicines used in the European Union, recently launched an initiative to determine guidelines for the use of genomic biomarkers in the development and lifecycle of drugs. On April 5, 2017, the European Union Parliament passed Regulation (EU) 2017/746, referred to as the IVD Device Regulation, or IVDR, which increases the regulatory requirements applicable to in vitro diagnostics in the EU and would require that we re-classify and obtain approval, registration, or clearance for our existing CE-marked IVD products within a five-year grace period (by May 25, 2022).

We may also be subject to additional FDA or global regulatory authority post-marketing obligations or requirements by the FDA or global regulatory authority to change our current product classifications which would impose additional regulatory obligations on us. The promotional claims we can make for Prosigna are limited to the indications for use in the United States as cleared by the FDA or outside the United States as authorized by the applicable regulatory authority. If we are not able to maintain regulatory compliance, we may not be permitted to market our medical device products and/or may be subject to enforcement actions by the FDA or other governmental authorities such as the issuance of warning or untitled letters, fines, injunctions, and civil penalties; recall or seizure of products; operating restrictions; and criminal prosecution. In addition, we may be subject to similar regulatory regimes of foreign jurisdictions as we continue to commercialize our products in new markets outside of the United States and Europe. Adverse Notified Body, EU Competent Authority or FDA or global regulatory authority action in any of these areas could significantly increase our expenses and limit our revenue and profitability.

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If we are unable to compete successfully, we may be unable to increase or sustain our revenue or achieve profitability.

Our principal competition for our tests comes from traditional methods used by physicians to diagnose and manage patient care decisions. For example, with our Afirma genomic classifier, practice guidelines in the United States have historically recommended that patients with indeterminate diagnoses from cytopathology results be considered for surgery to remove all or part of the thyroid to rule out cancer. This practice has been the standard of care in the United States for many years, and we need to continue to educate physicians about the benefits of the Afirma genomic classifier to change clinical practice.

We also face competition from companies and academic institutions that use next generation sequencing technology or other methods to measure mutational markers such as BRAF and KRAS, along with numerous other mutations. These organizations include Interpace Diagnostics Group, Inc., ~~Rosetta Genomics Ltd.,~~CBLPath, Inc./University of Pittsburgh Medical Center and others who are developing new products or technologies that may compete with our tests. In the future, we may also face competition from companies developing new products or technologies.

~~With the~~

We believe our primary competition in pulmonology with our Percepta and Envisia ~~tests, we believe our primary competition~~classifiers will similarly come from traditional methods used by physicians to diagnose the related diseases. For the Percepta test, we expect competition from companies focused on lung cancer such as ~~Integrated Diagnostics,~~Oncocyte Corporation and Biodesix, Inc. We believe our principal competitor in the breast cancer diagnostics market is Exact Sciences, Inc. (having combined with Genomic Health, Inc.), which currently commands a substantial majority of the market. As we expand our portfolio of tests to address clinical questions across the clinical care continuum, we may also ~~anticipate facing potential~~face competition from companies ~~offering~~focused on screening at-risk patients for cancer or ~~developing approaches for assessing malignancy risk in patients with lung nodules~~companies informing treatment decisions such as Guardant Health or GRAIL. Competition could also emerge using alternative samples, such as blood, urine or sputum. However, such “liquid biopsies” are ~~often~~currently being used ~~earlier in the diagnostic paradigm — for instance, to screen for cancer — or~~ to gauge risk of recurrence or response to ~~treatment.~~

treatment in patients already diagnosed with lung cancer.

In general, we also face competition from commercial laboratories, such as Laboratory Corporation of America Holdings and Sonic Healthcare USA, with strong infrastructure to support the commercialization of diagnostic services. We face potential competition from companies such as Illumina, Inc. and Thermo Fisher Scientific Inc., both of which have entered the clinical diagnostics market. Other potential competitors include companies that develop diagnostic products, such as Roche Diagnostics, a division of Roche Holding Ltd, Siemens AG and Qiagen N.V.

In addition, competitors may develop their own versions of our solutions in countries we may seek to enter where we do not have patents or where our intellectual property rights are not recognized and compete with us in those countries, including encouraging the use of their solutions by physicians in other countries.

To compete successfully, we must be able to demonstrate, among other things, that our diagnostic test results are accurate and cost effective, and we must secure a meaningful level of reimbursement for our products.

Many of our potential competitors have widespread brand recognition and substantially greater financial, technical and research and development resources, and selling and marketing capabilities than we do. Others may develop products with prices lower than ours that could be viewed by physicians and payers as functionally equivalent to our solutions, or offer solutions at prices designed to promote market penetration, which could force us to lower the list price of our solutions and affect our ability to achieve profitability. If we are unable to change clinical practice in a meaningful way or compete successfully against current and future competitors, we may be unable to increase market acceptance and sales of our products, which could prevent us from increasing our revenue or achieving profitability and could cause the market price of our common stock to decline. As we add new tests and services, we will face many of these same competitive risks for these new tests.

The loss of members of our senior management team or our inability to attract and retain key personnel could adversely affect our business.

Our success depends largely on the skills, experience and performance of key members of our executive management team and others in key management positions. The efforts of each of these persons together will be critical to us as we continue to develop our technologies and test processes and focus on our growth. If we were to lose one or more of these key employees, including due to illness resulting from COVID-19, we may experience difficulties in competing effectively, developing our technologies and implementing our business strategy.

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In addition, our research and development programs and commercial laboratory operations depend on our ability to attract and retain highly skilled scientists. We may not be able to attract or retain qualified scientists and technicians in the future due to the intense competition for qualified personnel among life science businesses, particularly in the San Francisco Bay Area. Our success in the development and commercialization of advanced diagnostics requires a significant medical and clinical staff to conduct studies and educate physicians and payers on the merits of our tests in order to achieve adoption and reimbursement. We are in a highly competitive industry to attract and retain this talent. Additionally, our success depends on our ability to attract and retain qualified sales-people. We recently significantly expanded our sales force as we invest in our multi-product sales strategy, which includes assignment of a single contact to successfully develop and implement relationships with our customers. There can be no assurance that we will be successful in maintaining and growing our business. Additionally, as we increase our sales channels for new tests we commercialize, including the Percepta and Envisia tests, or acquire, such as Prosigna, we may have difficulties recruiting and training additional sales personnel or retaining qualified salespeople, which could cause a delay or decline in the rate of adoption of our tests. As a public company located in the San Francisco Bay Area, we also face intense competition for highly skilled finance and accounting personnel. If we are unable to attract and retain finance and accounting personnel experienced in public company financial reporting, we risk being unable to close our books and file our public documents on a timely basis. Additionally, our success depends on our ability to attract and retain qualified sales people. We recently significantly expanded our sales force as we transitioned out of our Genzyme Corporation co-promotion agreement in the United States. There can be no assurance that we will be successful in maintaining and growing our business. Additionally, as we increase our sales channels for new tests we commercialize, including the Percepta and Envisia tests, we may have difficulties recruiting and training additional sales personnel or retaining qualified salespeople, which could cause a delay or decline in the rate of adoption of our tests. Finally, our business requires specialized capabilities in reimbursement, billing, and other areas and there may be a shortage of qualified individuals. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that could adversely affect our ability to support our research and development, clinical laboratory, sales and reimbursement, billing and finance efforts. All of our employees are at will, which means that either we or the employee may terminate their employment at any time. We do not carry key man insurance for any of our employees.

~~We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.~~

In addition to the need to scale our testing capacity, future growth, including our transition to a multi-product company with international operations, will impose significant added responsibilities on management, including the need to identify, recruit, train and integrate additional employees with the necessary skills to support the growing complexities of our business. Rapid and significant growth may place strain on our administrative, financial and operational infrastructure. Our ability to manage our business and growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. We have implemented an internally-developed data warehouse, which is critical to our ability to track our diagnostic services and patient reports delivered to physicians, as well as to support our financial reporting systems. The time and resources required to optimize these systems is uncertain, and failure to complete optimization in a timely and efficient manner could

~~adversely affect our operations. If we are unable to manage our growth effectively, it may be difficult for us to execute our business strategy and our business could be harmed.~~

Billing for our diagnostic tests is complex, and we must dedicate substantial time and resources to the billing process to be paid.

Billing for clinical laboratory testing services is complex, time-consuming and expensive. Depending on the billing arrangement and applicable law, we bill various payers, including Medicare, insurance companies and patients, all of which have different billing requirements. We generally bill third-party payers for our diagnostic tests and pursue reimbursement on a case-by-case basis where pricing contracts are not in place. To the extent laws or contracts require us to bill patient co-payments or co-insurance, we must also comply with these requirements. We may also face increased risk in our collection efforts, including potential write-offs of ~~doubtful~~ accounts receivable and long collection cycles, which could adversely affect our business, results of operations and financial condition.

Several factors make the billing process complex, including:

•

differences between the list price for our tests and the reimbursement rates of payers;

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compliance with complex federal and state regulations related to billing government payers, such as Medicare and Medicaid, including requirements to have an active CLIA certificate;

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risk of government audits related to billing Medicare and other government payers;

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disputes among payers as to which party is responsible for payment;

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differences in coverage and in information and billing requirements among payers, including the need for prior authorization and/or advanced notification;

•

the effect of patient co-payments or co-insurance;

•

changes to billing codes used for our tests;

•

incorrect or missing billing information; and

•

the resources required to manage the billing and claims appeals process.

Table of ~~payers;~~

~~compliance with complex federal and state regulations related to billing Medicare;~~Contents

~~risk of government audits related to billing Medicare;~~

~~disputes among payers as to which party is responsible for payment;~~

~~differences in coverage and in information and billing requirements among payers, including the need for prior authorization and/or advanced notification;~~

~~the effect of patient co-payments or co-insurance;~~

~~changes to billing codes used for our tests;~~

~~incorrect or missing billing information; and~~

~~the resources required to manage the billing and claims appeals process.~~

~~Standard~~

We use standard industry billing codes, known as CPT codes, ~~that we use~~ to bill for ~~cytopathology do not generally exist~~cytopathology. In addition, we use the CPT code 81545 to bill for our ~~proprietary molecular diagnostic tests.~~Afirma classifier. Effective January 1, 2021, we will use the new CPT code 81XX2 to bill for our Afirma classifier. Effective October 1, 2020, we will use the new CPT code 0204U to bill for Afirma Xpresion Atlas, and the new CPT code 0208U to bill for Afirma MTC. Effective January 1, 2021, we will use the new CPT code 81XX1 to bill for our Envisia classifier. There is no CPT code for our Percepta classifier. Therefore, until such time that we are ~~awarded~~assigned and are able to use a designated CPT code specific to ~~our tests,~~Percepta, we use ~~“miscellaneous”~~“unlisted” codes for claim ~~submissions. These~~submissions, which can lead to delays in payers adjudicating our claims or denying payment altogether.

CPT codes can change over time. When codes change, there is a risk of an error being made in the claim adjudication process. These errors can occur with claims submission, third-party transmission or in the processing of the claim by the payer. Claim adjudication errors may result in a delay in payment processing or a reduction in the amount of the payment received. Coding changes, therefore, may have an adverse effect on our revenues. Even when we receive a designated CPT code specific to our tests, ~~such as the one for the Afirma GEC that became effective January 1, 2016,~~ there can be no assurance that payers will recognize these codes in a timely manner or that the process of transitioning to such a code and updating their billing systems and ours will not result in errors, delays in payments and a related increase in accounts receivable balances.

As we introduce new tests, we will need to add new codes to our billing process as well as our financial reporting systems. Failure or delays in effecting these changes in external billing and internal systems and processes could negatively affect our collection rates, revenue and cost of collecting.

Correct coding is subject to the coding policies of the American Medical Association CPT Editorial Panel, or AMA CPT. With respect to claims submitted to Medicare and Medicaid, it is also subject to coding policies developed through the National Correct Coding Initiative, or NCCI. Other payers may develop their own payer-specific coding policies. The broader coding policies of the AMA CPT, NCCI, and other payers are subject to change. For instance, the NCCI recently adopted an update to its Coding Policy Manual effective January 1, 2019, to limit instances when multiple codes may be billed for molecular pathology testing. Although the NCCI appears to have moderated this change in its updates effective January 1, 2020, such coding policy changes may negatively affect our revenues and cash flow.

Additionally, our billing activities require us to implement compliance procedures and oversight, train and monitor our employees, challenge coverage and payment denials, assist patients in appealing claims, and undertake internal audits to evaluate compliance with applicable laws and regulations as well as internal compliance policies and procedures. Payers also conduct external audits to evaluate payments, which add further complexity to the billing process. If the payer makes an overpayment determination, there is a risk that we may be required to return some portion of prior payments we have received. Additionally, the ACA established a requirement for providers and suppliers to report and return any overpayments received from government payers under the Medicare and Medicaid programs within 60 days of identification. Failure to identify and return such overpayments exposes the provider or supplier to liability under federal false claims laws. These billing complexities, and the related uncertainty in obtaining payment for our tests, could negatively affect our revenue and cash flow, our ability to achieve profitability, and the consistency and comparability of our results of operations.

We rely on a third-party provider to transmit claims to payers, and any delay in transmitting claims could have an adverse effect on our revenue.

While we manage the overall processing of claims, we rely on a third-party provider to transmit the actual claims to payers based on the specific payer billing format. We have previously experienced delays in claims processing when our third-party provider made changes to its invoicing system, and again when it did not submit claims to payers within the timeframe we require. Additionally, coding for diagnostic tests may change, and such changes may cause short-term billing errors that may take significant time to resolve. If claims are not submitted to payers on a timely basis or are erroneously submitted, or if we are required to switch to a different provider to handle claim submissions, we may experience delays in our ability to process these claims and receipt of payments from payers, or possibly denial of claims for lack of timely submission, which would have an adverse effect on our revenue and our business.

~~Our future success will depend in part on~~

If our internal sales force is less successful than anticipated, our business expansion plans could suffer and our ability to ~~successfully transition~~generate revenues could be diminished. In addition, we have limited history selling our molecular diagnostics tests on a direct basis and our limited history makes forecasting difficult.

We acquired several international sales employees from ~~our relationship with Genzyme~~NanoString, and expect to ~~co-promote Afirma~~build upon this team as we offer additional tests internationally in the ~~United States.~~

~~We sell Afirma in the United States through~~future. If our internal sales team and, until recently, also through a co-promotion agreement with Genzyme Corporation, which we terminated effective September 9, 2016. In connection with the transition, we have hired additional sales personnel to sell our Afirma tests. If we are unsuccessful in transitioning the sales and marketing of the Afirma test from Genzyme solelyforce is not successful, however, or new additions to our ~~internal~~ sales ~~and marketing personnel,~~team fail to gain traction among our customers, we ~~may experience declining test volumes and associated declines in revenue. We~~ may not be able to increase market ~~or sell~~awareness and sales of our molecular diagnostic tests. If we fail to establish our molecular diagnostic tests in the Afirma test effectively enough to maintain or increase demand for the test, or without significant additional sales and marketing efforts and expense. Our failure to do so successfully without the benefit of Genzyme’s effortsmarketplace, it could have ~~an adverse~~a negative effect on our ~~business, financial condition~~ability to sell subsequent molecular diagnostic tests and ~~results~~hinder the desired expansion of ~~operations.~~our business. We have growing, however limited, historical experience forecasting the direct sales of our molecular diagnostics products. Our ability to produce test volumes that meet customer demand is dependent upon our ability to forecast accurately and plan production capacities accordingly.

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Developing new products involves a lengthy and complex process, and we may not be able to commercialize on a timely basis, or at all, other products we are developing.

We continually seek to develop enhancements to our current test offerings and additional diagnostic solutions that requires us to devote considerable resources to research and development. There can be no assurance that we will be able to identify other diseases that can be effectively addressed with our molecular cytology platform. In addition, if we identify such diseases, we may not be able to develop products with the diagnostic accuracy necessary to be clinically useful and commercially successful. We may face challenges obtaining sufficient numbers of samples to validate a genomic signature for a molecular diagnostic product. ~~We launched the Percepta test in April 2015 and the Envisia test in October 2016. We~~After launching new products, we still must complete studies that meet the clinical evidence required to obtain ~~reimbursement, which studies are currently underway.~~

reimbursement. Moreover, we may experience delays in the development and introduction of new products due to the effects of the current COVID-19 outbreak.

In order to develop and commercialize diagnostic tests, we need to:

~~expend significant funds to conduct substantial research and development;~~

~~conduct successful analytical and clinical studies;~~

~~scale our laboratory processes to accommodate new tests; and~~

~~build the commercial infrastructure to market and sell new products.~~

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expend significant funds to conduct substantial research and development;

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conduct successful analytical and clinical studies;

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scale our laboratory processes to accommodate new tests; and

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build the commercial infrastructure to market and sell new products.

Our product development process involves a high degree of risk and may take several years. Our product development efforts may fail for many reasons, including:

~~failure to identify a genomic signature in biomarker discovery;~~

~~inability to secure sufficient numbers of samples at an acceptable cost and on an acceptable timeframe to conduct analytical and clinical studies; or~~

~~failure of clinical validation studies to support the effectiveness of the test.~~

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failure to identify a genomic signature in biomarker discovery;

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inability to secure sufficient numbers of samples at an acceptable cost and on an acceptable timeframe to conduct analytical and clinical studies; or

•

failure of clinical validation studies to support the effectiveness of the test.

Typically, few research and development projects result in commercial products, and success in early clinical studies often is not replicated in later studies. At any point, we may abandon development of a product candidate or we may be required to expend considerable resources repeating clinical studies, which would adversely affect the timing for generating potential revenue from a new product and our ability to invest in other products in our pipeline. If a clinical validation study fails to demonstrate the ~~prospectively-defined~~prospectively defined endpoints of the study or if we fail to sufficiently demonstrate analytical validity, we might

choose to abandon the development of the product, which could harm our business. In addition, competitors may develop and commercialize competing products or technologies faster than us or at a lower cost.

~~If we are unable to develop products to keep pace with rapid technological, medical and scientific change, our operating results and competitive position could be harmed.~~

In recent years, there have been numerous advances in technologies relating to diagnostics, particularly diagnostics that are based on genomic information. These advances require us to continuously develop our technology and to work to develop new solutions to keep pace with evolving standards of care. Our solutions could become obsolete unless we continually innovate and expand our product offerings to include new clinical applications. If we are unable to develop new products or to demonstrate the applicability of our products for other diseases, our sales could decline and our competitive position could be harmed.

We may acquire businesses or assets, form joint ventures or make investments in other companies or technologies that could harm our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.

We acquired Allegro Diagnostics Corp. in September 2014, and we may pursue additional acquisitions of complementary businesses or assets, as well as technology licensing arrangements as part of our business strategy. We also may pursue strategic alliances that leverage our core technology and industry experience to expand our offerings or distribution, or make investments in other companies. To date, we have limited experience with respect to acquisitions and the formation of strategic alliances and joint ventures. We may not be able to integrate acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. In addition, we may not realize the expected benefits of an acquisition or investment. Any acquisitions made by us also could result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could harm our operating results. Integration of acquired companies or businesses we may acquire in the future also may require management resources that otherwise would be available for ongoing development of our existing business. We may not identify or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any acquisition, technology license, strategic alliance, joint venture or investment.

To finance any acquisitions or investments, we may choose to issue shares of our stock as consideration, which would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other companies for stock. Alternatively, it may be necessary for us to raise additional funds for these activities through public or private financings. Additional funds may not be available on terms that are favorable to us, or at all. If these funds are raised through the sale of equity or convertible debt securities, dilution to our stockholders could result. Our current credit agreement contains covenants that could limit our ability to sell debt securities or obtain additional debt financing arrangements, which could affect our ability to finance acquisitions or investments other than through the issuance of stock.

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

We are subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. CLIA regulations mandate specific quality standards, personnel qualifications and responsibilities, facility administration, general laboratory systems, quality assessment, quality control, pre-analytic, analytic, and post-analytic systems and proficiency testing. CLIA certification is also required for us to be eligible to bill state and federal healthcare programs, as well as many private third-party payers. To renew these certifications, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratories.

We are also required to maintain state licenses to conduct testing in our laboratories. California, New York, Texas, among other states’ laws, require that we maintain a license and comply with state regulation as a clinical laboratory. Other states may have similar requirements or may adopt similar requirements in the future. In addition, both of our clinical laboratories are required to be licensed on a test-specific basis by New York State. We have received approval for the Afirma and Percepta tests. We will be required to obtain approval for other tests we may offer in the future. If we were to lose our CLIA certificate or California license for our South San Francisco laboratory, whether as a result of revocation, suspension or limitation, we would no longer be able to perform our molecular tests, which would eliminate our primary source of revenue and harm our business. If we were to lose our CLIA certificate for our Austin laboratory, we would need to move the receipt and storage of FNAs, as well as the slide preparation for cytopathology, to South San Francisco, which could result in a delay in processing tests during that transition and increased costs. If we were to lose our licenses issued by New York or by other states where we are required to hold licenses, we would not be able to test specimens from those states. New tests we may develop may be subject to new approvals by regulatory bodies such as New York State, and we may not be able to offer our new tests until such approvals are received.

~~We may experience limits on our revenue if patients decide not to use our tests.~~

Some patients may decide not to use our tests because of price, all or part of which may be payable directly by the patient if the patient’s insurer denies reimbursement in full or in part. There is a growing trend among insurers to shift more of the cost of healthcare to patients in the form of higher co-payments or premiums, and this trend is accelerating which puts patients in the position of having to pay more for our tests. We expect to continue to see pressure from payers to limit the utilization of tests, generally, and we believe more payers are deploying costs containment tactics, such as pre-authorization and employing laboratory benefit managers to reduce utilization rates. Implementation of provisions of the ACA has also resulted in increases in premiums and reductions in coverage for some patients. In addition, Congressional efforts to repeal the ACA could result in an increase in uninsured patients. These events may result in patients delaying or forgoing medical checkups or treatment due to their inability to pay for our tests, which could have an adverse effect on our revenue.

~~Complying with numerous statutes and regulations pertaining to our business is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.~~

~~Our operations are subject to other extensive federal, state, local, and foreign laws and regulations, all of which are subject to change. These laws and regulations currently include, among others:~~

the Federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which established comprehensive federal standards with respect to the privacy and security of protected health information and requirements for the use of certain standardized electronic transactions, and amendments made in 2013 to HIPAA under the Health Information Technology for Economic and Clinical Health Act, or HITECH, which strengthen and expand HIPAA privacy and security compliance requirements, increase penalties for violators, extend enforcement authority to state attorneys general, and impose requirements for breach notification;

~~Medicare billing and payment regulations applicable to clinical laboratories;~~

the Federal Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal healthcare program;

the Federal Stark physician self-referral law (and state equivalents), which prohibits a physician from making a referral for certain designated health services covered by the Medicare program, including laboratory and pathology services, if the physician or an immediate family member has a financial relationship with the entity providing the designated health services, unless the financial relationship falls within an applicable exception to the prohibition;

the Federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state health care program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state health care program, unless an exception applies;

the Federal False Claims Act, which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government;

other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, fee-splitting restrictions, prohibitions on the provision of products at no or discounted cost to induce physician or patient adoption, and false claims acts, which may extend to services reimbursable by any third-party payer, including private insurers;

~~the prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims to any other party;~~

the rules regarding billing for diagnostic tests reimbursable by the Medicare program, which prohibit a physician or other supplier from marking up the price of the technical component or professional component of a diagnostic test ordered by the physician or other supplier and supervised or performed by a physician who does not “share a practice” with the billing physician or supplier;

state laws that prohibit other specified practices related to billing such as billing physicians for testing that they order, waiving co-insurance, co-payments, deductibles, and other amounts owed by patients, and billing a state Medicaid program at a price that is higher than what is charged to other payers;

~~the Foreign Corrupt Practices Act of 1977, and other similar laws, which apply to our international activities; and~~

unclaimed property (escheat) laws and regulations, which may require us to turn over to governmental authorities the property of others held by us that has been unclaimed for a specified period of time.

We have adopted policies and procedures designed to comply with applicable laws and regulations. In the ordinary course of our business, we conduct internal reviews of our compliance with these laws. Our compliance with some of these laws and regulations is also subject to governmental review. The growth of our business and sales organization and our expansion outside of the United States may increase the potential of violating these laws or our internal policies and procedures. We believe that we are in material compliance with all statutory and regulatory requirements, but there is a risk that one or more government agencies could take a contrary position. These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. If one or more such agencies alleges that we may be in violation of any of these requirements, regardless of the outcome, it could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations and other commercial third-party payers. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines, we could be required to refund payments received by us, and we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business and our financial results.

~~International expansion of our business exposes us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.~~

Our business strategy includes international expansion in select countries, and may include developing and maintaining physician outreach and education capabilities outside of the United States, establishing agreements with laboratories, and expanding our relationships with international payers. Doing business internationally involves a number of risks, including:

multiple, conflicting and changing laws and regulations such as tax laws, privacy laws, export and import restrictions, employment laws, regulatory requirements and other governmental approvals, permits and licenses;

~~failure by us to obtain regulatory approvals where required for the use of our solutions in various countries;~~

~~complexities associated with managing multiple payer reimbursement regimes, government payers or patient self-pay systems;~~

~~logistics and regulations associated with shipping tissue samples, including infrastructure conditions and transportation delays;~~

~~challenges associated with establishing laboratory partners, including proper sample collection techniques, inventory management, sample logistics, billing and promotional activities;~~

~~limits on our ability to penetrate international markets if we are not able to process tests locally;~~

~~financial risks, such as longer payment cycles, difficulty in collecting from payers, the effect of local and regional financial crises, and exposure to foreign currency exchange rate fluctuations;~~

~~natural disasters, political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions; and~~

regulatory and compliance risks that relate to maintaining accurate information and control over activities that may fall within the purview of the Foreign Corrupt Practices Act of 1977, including both its books and records provisions and its anti-bribery provisions.

~~Any of these factors could significantly harm our future international expansion and operations and, consequently, our revenue and results of operations.~~

~~If we are sued for product liability or errors and omissions liability, we could face substantial liabilities that exceed our resources.~~

The marketing, sale and use of our current or future tests could lead to product liability claims if someone were to allege that the tests failed to perform as they were designed. We may also be subject to liability for errors in the results we provide to physicians or for a misunderstanding of, or inappropriate reliance upon, the information we provide. Our Afirma classifiers are performed on FNA samples that are diagnosed as indeterminate by standard cytopathology review. We report results as benign or suspicious to the prescribing physician. Under certain circumstances, we might report a result as benign that later proves to have been malignant. This could be the result of the physician having poor nodule sampling in collecting the FNA, performing the FNA on a different nodule than the one that is malignant or failure of the classifier to perform as intended. We may also be subject to similar types of claims related to our Percepta and Envisia tests, as well as tests we may develop in the future. A product liability or errors and omissions liability claim could result in substantial damages and be costly and time consuming for us to defend. Although we maintain product liability and errors and omissions insurance, we cannot assure you that our insurance would fully protect us from the financial impact of defending against these types of claims or any judgments, fines or settlement costs arising out of any such claims. Any product liability or errors and omissions liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could cause injury to our reputation or cause us to suspend sales of our products and solutions. The occurrence of any of these events could have an adverse effect on our business and results of operations.

If our laboratory in South San Francisco becomes inoperable due to an earthquake or either of our laboratories becomes inoperable for any other reason, we will be unable to perform our testing services and our business will be harmed.

We perform all of the Afirma, Percepta and Envisia genomic classifier testing at our laboratory in South San Francisco, California. Our laboratory in Austin, Texas accepts and stores substantially all Afirma FNA samples pending transfer to our California laboratory for genomic test processing. The laboratories and equipment we use to perform our tests would be costly to replace and could require substantial lead time to replace and qualify for use if they became inoperable. Either of our facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, flooding and power outages, which may render it difficult or impossible for us to perform our testing services for some period of time or to receive and store samples. The inability to perform our tests for even a short period of time may result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future. Although we maintain insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, if at all.

If we cannot enter into new clinical study collaborations, our product development and subsequent commercialization could be delayed.

In the past, we have entered into clinical study collaborations, and our success in the future depends in part on our ability to enter into additional collaborations with highly regarded institutions. This can be difficult due to internal and external constraints placed on these organizations. Some organizations may limit the number of collaborations they have with any one company so as to not be perceived as biased or conflicted. Organizations may also have insufficient administrative and related infrastructure to enable collaboration with many companies at once, which can extend the time it takes to develop, negotiate and implement a collaboration. Moreover, it may take longer to obtain the samples we need which could delay our trials, publications, and product launches and reimbursement. Additionally, organizations often insist on retaining the rights to publish the clinical data resulting from the collaboration. The publication of clinical data in peer-reviewed journals is a crucial step in commercializing and obtaining reimbursement for our diagnostic tests, and our inability to control when and if results are published may delay or limit our ability to derive sufficient revenue from them.

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If we are unable to develop products to keep pace with rapid technological, medical and scientific change, our operating results and competitive position could be harmed.

Our Loan and Security Agreement provides our lenders with a first-priority lien against substantially all of our assets, excluding our intellectual property, and contains financial covenants and other restrictions on our actions, which could limit our operational flexibility and otherwise adversely affect our financial condition.

Our Loan and Security Agreement restricts our ability to, among other things, incur liens, make investments, incur indebtedness, merge with or acquire other entities, dispose of assets, make dividends or other distributions to holders of its equity interests, engage in any new line of business, or enter into certain transactions with affiliates, in each case subject to certain exceptions. It also requires us to achieve certain revenue levels tested quarterly on a trailing twelve-month basis. However, failure to maintain the revenue levels will not be considered a default if the sum of our unrestricted cash and cash equivalents maintained with Silicon Valley Bank and amount available under the Revolving Line of Credit is at least $40.0 million. Our ability to comply with these and other covenants is dependent upon a number of factors, some of which are beyond our control.

Our failure to comply with the financial covenants, or the occurrence of other events specified in our Loan and Security Agreement, could result in an event of default under the Loan and Security Agreement, which would give our lenders the right to terminate their commitments to provide additional loans under the Loan and Security Agreement and to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable. In addition, we have granted our lenders a first-priority lien against all of our assets, excluding our intellectual property, as collateral. Failure to comply with the covenants or other restrictions in the Loan and Security Agreement could result in a default. If the debt under our Loan and Security Agreement was to be accelerated, we may not have sufficient cash on hand or be able to sell sufficient collateral to repay it, which would have an immediate adverse effect on our business and operating results. This could potentially cause us to cease operations and result in a complete loss of your investment in our common stock.

Complying with numerous statutes and regulations pertaining to our business is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.

Our operations are subject to other extensive federal, state, local, and foreign laws and regulations, all of which are subject to change. These laws and regulations currently include, among others:

•

Medicare billing and payment regulations applicable to clinical laboratories, including requirements to have an active CLIA certificate;

•

the Federal Anti-kickback Statute (and state equivalents), which prohibits knowingly and willfully offering, paying, soliciting, or receiving remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal healthcare program;

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the Eliminating Kickbacks in Recovery Act of 2018, which prohibits the solicitation, receipt, payment or offering of any remuneration in return for referring a patient or patronage to a recovery home, clinical treatment facility, or laboratory for services covered by both government and private payers;

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the Federal False Claims Act, which imposes liability on any person or entity who knowingly presents, or causes to be presented, a false, fictitious, or fraudulent claim for payment to the federal government;

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the prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims to any other party;

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the Protecting Access to Medicare Act of 2014, which requires us to report private payer rates and test volumes for specific CPT codes on a triennial basis and imposes penalties for failures to report, omissions, or misrepresentations;

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the Foreign Corrupt Practices Act of 1977, and other similar laws, which apply to our international activities;

•

enforcing our intellectual property rights.

In recent years U.S. Attorneys’ Offices have increased scrutiny of the healthcare industry, as have Congress, the Department of Justice, the Department of Health and Human Services’ Office of the Inspector General and the Department of Defense. These bodies have all issued subpoenas and other requests for information to conduct investigations of, and commenced civil and criminal litigation against, healthcare companies based on financial arrangements with health care providers, regulatory compliance, product promotional practices and documentation, and coding and billing practices.

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Whistleblowers have filed numerous qui tam lawsuits against healthcare companies under the federal and state False Claims Acts in recent years, in part because the whistleblower can receive a portion of the government’s recovery under such suits.

These laws and regulations are complex and are subject to interpretation by the courts and by government agencies. If one or more such agencies alleges that we may be in violation of any of these requirements, regardless of the outcome, it could damage our reputation and adversely affect important business relationships with third parties, including managed care organizations and other commercial third-party payers. Any action brought against us for violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines, we could be required to refund payments received by us, and we could be required to curtail or cease our operations. Any of the foregoing consequences could seriously harm our business and our financial results.

If we use hazardous materials in a manner that causes contamination or injury, we could be liable for resulting damages.

We are subject to federal, state and local laws, rules and regulations governing the use, discharge, storage, handling and disposal of biological material, chemicals and waste. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, remediation costs and any related penalties or fines, and any liability could exceed our resources or any applicable insurance coverage we may have. The cost of compliance with these laws and regulations may become significant, and our failure to comply may result in substantial fines or other consequences, and either could negatively affect our operating results.

International expansion of our business exposes us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.

•

failure by us to obtain regulatory approvals where required for the use of our solutions in various countries;

•

complexities associated with managing multiple payer reimbursement regimes, government payers or patient self-pay systems;

•

logistics and regulations associated with shipping tissue samples, including infrastructure conditions and transportation delays;

•

challenges associated with establishing laboratory partners, including proper sample collection techniques, management of supplies, sample logistics, billing and promotional activities;

•

limits on our ability to penetrate international markets if we are not able to process tests locally;

•

financial risks, such as longer payment cycles, difficulty in collecting from payers, the effect of local and regional financial crises, and exposure to foreign currency exchange rate fluctuations;

•

natural disasters, political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, including COVID-19, boycotts, curtailment of trade and other business restrictions; and

•

Any of these factors could significantly harm our future international expansion and operations and, consequently, our revenue and results of operations.

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Our reliance on distributors for sales of our products outside of the United States, and on clinical laboratories for delivery of Prosigna testing services, could limit or prevent us from selling our products and impact our revenue.

We have established distribution agreements for our nCounter Analysis System for diagnostic use and related diagnostic kit products in certain countries where we do not sell directly. We intend to continue to grow our business internationally, and to do so we must attract additional distributors and retain existing distributors to maximize the commercial opportunity for our products. There is no guarantee that we will be successful in attracting or retaining desirable sales and distribution partners or that we will be able to enter into such arrangements on favorable terms. Distributors may not commit the necessary resources to market and sell our products to the level of our expectations or may choose to favor marketing the products of our competitors. If current or future distributors do not perform adequately, or we are unable to enter into effective arrangements with distributors in particular geographic areas, we may not realize long-term international revenue growth.

Similarly, we or our distributors have entered into agreements with clinical laboratories globally to provide Prosigna testing services. We do not provide testing services directly and, thus, we are reliant on these clinical laboratories to actively promote and sell Prosigna testing services. These clinical laboratories may take longer than anticipated to begin offering Prosigna testing services and may not commit the necessary resources to market and sell Prosigna testing services to the level of our expectations. Furthermore, we intend to contract with additional clinical laboratories to offer Prosigna testing services, including physician-owned laboratories, and we may be unsuccessful in attracting and contracting with new clinical laboratory providers. If current or future Prosigna testing service providers do not perform adequately, or we are unable to enter into contracts with additional clinical laboratories to provide Prosigna testing services, we may not be successful selling Prosigna and our future revenue prospects may be adversely affected.

If we are sued for product liability or errors and omissions liability, we could face substantial liabilities that exceed our resources.

The marketing, sale and use of our current or future tests could lead to product liability claims if someone were to allege that the tests failed to perform as they were designed. We may also be subject to liability for errors in the results we provide to physicians or for a misunderstanding of, or inappropriate reliance upon, the information we provide. Our Afirma classifiers are performed on FNA samples that are diagnosed as indeterminate by standard cytopathology review. We report results as benign or suspicious to the prescribing physician. Under certain circumstances, we might report a result as benign that later proves to have been malignant. This could be the result of the physician having poor nodule sampling in collecting the FNA, performing the FNA on a different nodule than the one that is malignant or failure of the classifier to perform as intended. We may also be subject to similar types of claims related to our Percepta, Envisia and Prosigna tests, as well as tests we may develop or acquire in the future. A product liability or errors and omissions liability claim could result in substantial damages and be costly and time consuming for us to defend. Although we maintain product liability and errors and omissions insurance, we cannot assure you that our insurance would fully protect us from the financial impact of defending against these types of claims or any judgments, fines or settlement costs arising out of any such claims. Any product liability or errors and omissions liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could cause injury to our reputation or cause us to suspend sales of our products and solutions. The occurrence of any of these events could have an adverse effect on our business and results of operations.

Our business is subject to the risk of disruptions caused by pandemics, political events, war, terrorism, earthquakes, fire, power outages, floods, and other catastrophic events.

War, terrorism, geopolitical uncertainties, trade restrictions, public health issues, natural disasters and other catastrophic events may cause damage or disruption to the economy and commerce on a global, regional or country-specific basis, and could disrupt supply or delivery of, or demand for, our products. For example, the COVID-19 outbreak has had, and we expect will continue to have, a negative effect on consumer confidence and spending, and other impacts, which could adversely affect our business.

If a catastrophe strikes either of our laboratories or if either of our laboratories becomes inoperable for any other reason, we will be unable to perform our testing services and our business will be harmed.

We perform all of the Afirma, Percepta and Envisia genomic classifier testing at our laboratory in South San Francisco, California, near major earthquake faults known for seismic activity and in a region affected by wildfires. Our laboratory in Austin, Texas accepts and stores the majority of our Afirma FNA samples pending transfer to our California laboratory for genomic test processing. The laboratories and equipment we use to perform our tests would be costly to replace and could require substantial lead time to replace and qualify for use if they became inoperable. Either of our facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, flooding and power outages, which may render it difficult or impossible for us to perform our testing services for some period of time or to receive and store samples. The inability to perform our tests for even a short period of time may result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future. Although we maintain insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, if at all.

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Our inability to raise additional capital on acceptable terms in the future may limit our ability to develop and commercialize new solutions and technologies and expand our operations.

We expect continued capital expenditures and operating losses over the next few years as we expand our infrastructure, commercial operations and research and development activities. We may seek to raise additional capital through equity offerings, debt financings, collaborations or licensing arrangements. Additional funding may not be available to us on acceptable terms, or at all. If we raise funds by issuing equity securities, dilution to our 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, and other operating restrictions that could adversely affect our ability to conduct our business. Our ~~current credit agreement~~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. The trading prices for our common stock and other biotechnology companies have been highly volatile as a result of the COVID-19 pandemic, which may reduce our ability to access capital on favorable terms or at all. In addition, a recession, depression or other sustained adverse market event resulting from the spread of COVID-19 could materially and adversely affect our business and the value of our common stock. 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. 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 our company.

Security breaches, loss of data and other disruptions to us or our third-party service providers could compromise sensitive information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.

In the ordinary course of our business, we and our third-party service providers collect and store sensitive data, including legally protected health information, personally identifiable information about our patients, credit card information, intellectual property, and our proprietary business and financial information. We manage and maintain our applications and data utilizing a combination of on-site systems, managed data center systems and cloud-based data center systems. We face a number of risks related to our protection of, and our service providers’ protection of, this critical information, including loss of access, inappropriate disclosure and inappropriate access, as well as risks associated with our ability to identify and audit such events.

System failures or outages, including any potential disruptions due to significantly increased global demand on certain cloud based systems during the COVID-19 pandemic, could compromise our ability to perform these functions in a timely manner, which could harm our ability to conduct business or delay our financial reporting. Such failures could materially adversely affect our operating results and financial condition.

The secure processing, storage, maintenance and transmission of this critical information is vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or otherwise breached due to employee error, malfeasance or other activities. While we are not aware of any such attack or breach, if such event would occur and cause interruptions in our operations, our networks would be compromised and the information we store on those networks could be accessed by unauthorized parties, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under federal, state, and international laws that protect the privacy of personal information, such as HIPAA, and regulatory penalties. Unauthorized access, loss or dissemination could also disrupt our operations, including our ability to process tests, provide test results, bill payers or patients, process claims and appeals, provide customer assistance services, conduct research and development activities, collect, process and prepare company financial information, provide information about our tests and other patient and physician education and outreach efforts through our website, manage the administrative aspects of our business and damage our reputation, any of which could adversely affect our business.

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In addition, the interpretation and application of consumer, health-related and data protection laws in the United States, Europe and elsewhere are often uncertain, contradictory and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our practices. If so, this could result in government-imposed fines or orders requiring that we change our practices, which could adversely affect our business. In addition, we are subject to various state laws, including the California Consumer Privacy Act, or CCPA, which was enacted in ~~October 2015,~~California in 2018 and components of which went into effect on January 1, 2020. The CCPA, among other things, requires covered companies to provide disclosures to California consumers concerning the collection and sale of personal information, and gives such consumers the right to opt-out of certain sales of personal information. Amendments to the CCPA have been made since its enactment, and it remains unclear what, if any, further amendments will be made to this legislation or how it will be interpreted. We cannot yet predict the impact of the CCPA on our business or operations, but it may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply.

Recent developments in Europe have created compliance uncertainty regarding the processing of personal data from Europe. For example, the General Data Protection Regulation, or GDPR, which became effective in the European Union on May 25, 2018, applies to our activities conducted from an establishment in the EU or related to products and services that we offer to European Union users. The GDPR creates new compliance obligations applicable to our business, which could cause us to change our business practices, and increases financial penalties for noncompliance (including possible fines of up to 4% of global annual turnover for the preceding financial year or €20 million (whichever is higher) for the most serious infringements). On July 16, 2020, the Court of Justice ~~invalidated~~of the European Union issued a ~~safe-harbor agreement between~~decision invalidating outright the EU-US Privacy Shield framework which companies rely on to transfer data from the European Union to the United States and European Union member-states, which addressed how U.S. companies handle personal information of European customers. On May 4, 2016, the European Commission published a new Regulation and a new Directive regarding personal data privacy. The Regulation went into force on May 24, 2016 and shall apply beginning May 25, 2018. The Directive went into force on May 5, 2016 and EU member states must transpose it into their national law by May 6, 2018.States. As a result, we may need to modify the way we treat such information. ~~Complying with these various laws could cause us to incur substantial costs or require us to change our business practices, systems and compliance procedures in a manner adverse to our business.~~

If we cannot license rights to use technologies on reasonable terms, we may not be able to commercialize new products in the future.

In the future, we may license third-party technology to develop or commercialize new products. In return for the use of a third-party’s technology, we may agree to pay the licensor royalties based on sales of our solutions. Royalties are a component of cost of revenue and affect the margins on our solutions. We may also need to negotiate licenses to patents and patent applications after introducing a commercial product. Our business may suffer if we are unable to enter into the necessary licenses on acceptable terms, or at all, if any necessary licenses are subsequently terminated, if the licensors fail to abide by the terms of the license or fail to prevent infringement by third parties, or if the licensed patents or other rights are found to be invalid or unenforceable.

If we are unable to protect our intellectual property effectively, our business would be harmed.

We rely on patent protection as well as trademark, copyright, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us and we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property.

We apply for and in-license patents covering our products and technologies and uses thereof, as we deem appropriate, however we may fail to apply for patents on important products and technologies in a timely fashion or at all, or we may fail to apply for patents in potentially relevant jurisdictions. ~~We have thirteen~~Our issued patents ~~that~~ expire between ~~2029~~2021 and ~~2032~~2038 and are related to methods used in thyroid diagnostics, lung diagnostics, breast cancer diagnostics, and the Afirma diagnostic platform, in addition to fourteen pending U.S. utility patent applications, one pending Patent Cooperation Treaty, or PCT, patent application and four U.S. provisional patent applications. Some of these U.S. utility patent applications have pending foreign counterparts. We also exclusively licensed intellectual property, including rights to four issued patents that will expire between 2030 and 2032, and three pending U.S. utility patent applications in the thyroid space that would expire between 2030 and 2033 once issued, related to methods that are used in the Afirma diagnostic test, some of which have foreign counterparts. In the lung diagnostic space, we have exclusively licensed intellectual property rights to eighteen pending patent applications and nine issued patents. Patents issuing from the licensed portfolio will expire between 2024 and 2028. In addition, we own a pending U.S. patent application and pending foreign counterpart patent applications in Australia, Canada, China, Europe, Japan, and South Korea related to our Percepta test. We also own one U.S. patent application and one counterpart European patent application related to another lung disease, and two pending U.S. patent applications, five patent applications abroad, and one PCT patent application related to Envisia. Any patents granted from our current lung cancer patent applications will expire no earlier than 2035 and those from the interstitial lung disease patent applications will expire no earlier than 2034. nCounter analysis platform.

It is possible that none of our pending patent applications will result in issued patents in a timely fashion or at all, and even if patents are granted, they may not provide a basis for intellectual property protection of commercially viable products, may not provide us with any competitive advantages, or may be challenged and invalidated by third parties. It is possible that others will design around our current or future patented technologies. We may not be successful in defending any challenges made against our patents or patent applications. Any successful third-party challenge to our patents could result in the unenforceability or invalidity of such patents and increased competition to our business. The outcome of patent litigation can be uncertain and any attempt by us to enforce our patent rights against others may not be successful, or, if successful, may take substantial time and result in substantial cost, and may divert our efforts and attention from other aspects of our business.

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The patent positions of life sciences companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies’ patents has emerged to date in the United States or elsewhere. Courts frequently render opinions in the biotechnology field that may affect the patentability of certain inventions or discoveries, including opinions that may affect the patentability of methods for analyzing or comparing nucleic acids.

In particular, the patent positions of companies engaged in the development and commercialization of genomic diagnostic tests are particularly uncertain. Various courts, including the U.S. Supreme Court, have rendered decisions that affect the scope of patentability of certain inventions or discoveries relating to certain diagnostic tests and related methods. These decisions state, among other things, that patent claims that recite laws of nature (for example, the relationship between blood levels of certain metabolites and the likelihood that a dosage of a specific drug will be ineffective or cause harm) are not themselves patentable. What constitutes a law of nature is uncertain, and it is possible that certain aspects of genomic diagnostics tests would be considered natural laws. Accordingly, the evolving case law in the United States may adversely affect our ability to obtain patents and may facilitate third-party challenges to any owned and licensed patents.

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States, and we may encounter difficulties protecting and defending such rights in foreign jurisdictions. The legal systems of many

other countries do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biotechnology, which could make it difficult for us to stop the infringement of our patents in such countries. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property. We cannot predict the breadth of claims that may be allowed or enforced in our patents or in third-party patents. We may not develop additional proprietary products, methods and technologies that are patentable.

In addition to pursuing patents on our technology, we take steps to protect our intellectual property and proprietary technology by entering into agreements, including confidentiality agreements, non-disclosure agreements and intellectual property assignment agreements, with our employees, consultants, academic institutions, corporate partners and, when needed, our advisors. Such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements, and we may not be able to prevent such unauthorized disclosure. If we are required to assert our rights against such party, it could result in significant cost and distraction.

Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets.

We may also be subject to claims that our employees have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers, or to claims that we have improperly used or obtained such trade secrets. Litigation may be necessary to defend against these claims. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights and face increased competition to our business. A loss of key research personnel work product could hamper or prevent our ability to commercialize potential products, which could harm our business. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.

Further, competitors could attempt to replicate some or all of the competitive advantages we derive from our development efforts, willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that fall outside of our intellectual property rights. Others may independently develop similar or alternative products and technologies or replicate any of our products and technologies. If our intellectual property does not adequately protect us against competitors’ products and methods, our competitive position could be adversely affected, as could our business.

We have not registered certain of our trademarks in all of our potential geographic markets. If we apply to register these trademarks, our applications may not be allowed for registration in a timely fashion or at all, and our registered trademarks may not be maintained or enforced. In addition, opposition or cancellation proceedings may be filed against our trademark applications and registrations, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would. If some other business in one of these markets already owns a trademark that is confusingly similar to one of our trademarks, we may be prohibited from entering that market under our trademark unless we re-brand our product in that location. Similarly, if we develop a new product line, there is no guaranty that one of our existing trademarks will be available as the brand for that new product line. Under those circumstances, we may incur the cost of developing a new trademark for this new product line.

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To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of direct competition. If our intellectual property does not provide adequate coverage of our competitors’ products, our competitive position could be adversely affected, as could our business. Both the patent application process and the process of managing patent disputes can be time consuming and expensive.

We may be involved in litigation related to intellectual property, which could be time-intensive and costly and may adversely affect our business, operating results or financial condition.

We may receive notices of claims of direct or indirect infringement or misappropriation or misuse of other parties’ proprietary rights from time to time. Some of these claims may lead to litigation. We cannot assure you that we will prevail in such actions, or that other actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us of third-party patents and trademarks or other rights, or the validity of our patents, trademarks or other rights, will not be asserted or prosecuted against us.

We might not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first to file patent applications for these inventions. To determine the priority of these inventions, we may have to participate in interference proceedings, derivation proceedings, or other post-grant proceedings declared by the U.S. Patent and

Trademark Office that could result in substantial cost to us. No assurance can be given that other patent applications will not have priority over our patent applications. In addition, recent changes to the patent laws of the United States allow for various post-grant opposition proceedings that have not been extensively tested, and their outcome is therefore uncertain. Furthermore, if third parties bring these proceedings against our patents, we could experience significant costs and management distraction.

Litigation may be necessary for us to enforce our patent and proprietary rights or to determine the scope, coverage and validity of the proprietary rights of others. The outcome of any litigation or other proceeding is inherently uncertain and might not be favorable to us, and we might not be able to obtain licenses to technology that we require on acceptable terms or at all. Further, we could encounter delays in product introductions, or interruptions in product sales, as we develop alternative methods or products. In addition, if we resort to legal proceedings to enforce our intellectual property rights or to determine the validity, scope and coverage of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. Any litigation that may be necessary in the future could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results or financial condition.

As we move into new markets and applications for our products, incumbent participants in such markets may assert their patents and other proprietary rights against us as a means of slowing our entry into such markets or as a means to extract substantial license and royalty payments from us. Our competitors and others may now and, in the future, have significantly larger and more mature patent portfolios than we currently have. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may provide little or no deterrence or protection. Therefore, our commercial success may depend in part on our non-infringement of the patents or proprietary rights of third parties. Numerous significant intellectual property issues have been litigated, and will likely continue to be litigated, between existing and new participants in our existing and targeted markets and competitors may assert that our products infringe their intellectual property rights as part of a business strategy to impede our successful entry into or growth in those markets. Third parties may assert that we are employing their proprietary technology without authorization. In addition, our competitors and others may have patents or may in the future obtain patents and claim that making, having made, using, selling, offering to sell or importing our products infringes these patents. We could incur substantial costs and divert the attention of our management and technical personnel in defending against any of these claims. Parties making claims against us may be able to obtain injunctive or other relief, which could block our ability to develop, commercialize and sell products, and could result in the award of substantial damages against us. In the event of a successful claim of infringement against us, we may be required to pay damages and ongoing royalties, and obtain one or more licenses from third parties, or be prohibited from selling certain products. We may not be able to obtain these licenses on acceptable terms, if at all. We could incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our financial results. In addition, we could encounter delays in product introductions while we attempt to develop alternative methods or products to avoid infringing third-party patents or proprietary rights. Defense of any lawsuit or failure to obtain any of these licenses could prevent us from commercializing products, and the prohibition of sale of any of our products could materially affect our business and our ability to gain market acceptance for our products.

With respect to trademarks, infringement litigation or threats of infringement litigation may require us to re-brand our product in order to enter into the new mark.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

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In addition, our agreements with some of our customers, suppliers or other entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims, including the types of claims described above. We could also voluntarily agree to defend or indemnify third parties in instances where we are not obligated to do so if we determine it would be important to our business relationships. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that could adversely affect our business, operating results, or financial condition.

Our ability to use our net operating loss carryforwards may be limited and may result in increased future tax liability to us.

We have incurred net losses since our inception and may never achieve profitability. As of December 31, 2019, we had net operating loss, or NOL, carryforwards of approximately $236.9 million, $58.3 million and $45.2 million available to reduce future taxable income, if any, for federal, California and other state income tax purposes, respectively. The U.S. federal NOL carryforwards will begin to expire in 2026 while for state purposes, the NOL carryforwards begin to expire in 2028. These NOL carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the Tax Cuts and Jobs Acts, or Tax Act, which was enacted in December 2017, federal NOLs incurred in tax years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such federal NOLs is limited. It is uncertain if and to what extent various states will conform to the newly enacted federal tax law.

To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. We may be ~~unable to~~limited in the portion of NOL carryforwards that we can use ~~these losses~~in the future to offset taxable income ~~before those unused losses expire. Generally,~~for U.S. federal and state income tax purposes, and federal tax credits to offset federal tax liabilities. Sections 382 and 383 of Internal Revenue Code limit the use of NOLs and tax credits after a cumulative change in corporate ownership of more than 50% ~~in the ownership of a corporation’s stock, by value, over~~occurs within a three-year ~~period constitutes an ownership change for U.S. federal income~~period. The limitation could prevent a corporation from using some or all its NOL and tax ~~purposes. An ownership change may~~credits before they expire within their normal 20-year lifespan, as it places a formula limit of how much NOL and tax credits a ~~company’s ability to~~loss corporation can use ~~its net operating loss carryforwards attributable to the period prior to such change.~~in a tax year. In the event we have undergone an ownership change under Section 382 of the Internal Revenue

Code, if we earn net taxable income, our ability to use our pre-change ~~net operating loss~~NOL carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability to us.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law. The CARES Act changes certain provisions of the 2017 Tax Act. Under the CARES Act, NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021 may be carried back to each of the five taxable years preceding the tax year of such loss, but NOLs arising in taxable years beginning after December 31, 2020 may not be carried back. In addition, the CARES Act eliminates the limitation on the deduction of NOLs to 80% of current year taxable income for taxable years beginning before January 1, 2021, and increases the amount of interest expense that may be deducted to 50% of adjusted taxable income for taxable years beginning in 2019 or 2020. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act, as modified by the CARES Act, is uncertain and our business, financial conditions, results of operations and growth prospects could be materially and adversely affected. In addition, it is uncertain if and to what extent various states will conform to the Tax Act, as modified by the CARES Act. The impact of the Tax Act, as modified by the CARES Act, on holders of our common stock is also uncertain and could be adverse.

If our goodwill or intangible assets become impaired, we may be required to record a significant charge to earnings.

We review our goodwill and intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable, such as declines in stock price, market capitalization, or cash flows and slower growth rates in our industry. Goodwill is required to be tested for impairment at least annually. If we are required to record a significant charge in our consolidated financial statements during the period in which any impairment of our goodwill or intangible assets is determined, that would negatively affect our operating results.

Changes in financial accounting standards or practices may cause adverse, unexpected financial reporting fluctuations and affect our reported operating results.

U.S. GAAP is subject to interpretation by the Financial Accounting Standards Board, the Securities and Exchange Commission, or the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

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Our condensed consolidated financial statements are subject to change and if our estimates or judgments relating to our critical accounting policies prove to be incorrect, our operating results could be adversely affected.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and related notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q. The results of these estimates form the basis for making judgments about the carrying values of assets, liabilities, and equity, and the amount of revenue and expenses that are not readily apparent from other sources. Critical accounting policies and estimates used in preparing our condensed consolidated financial statements include those related to revenue recognition, finite-lived intangible assets, goodwill, and stock-based compensation expense. Our operating results may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our operating results to fall below the expectations of securities analysts and investors, resulting in a decline in the price of our common stock.

Risks Related to Being a Public Company

We will continue to incur increased costs and demands on management as a result of compliance with laws and regulations applicable to public companies, which could harm our operating results.

As a public company, we will continue to incur significant legal, accounting, consulting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. In addition, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, as well as rules implemented by the ~~Securities and Exchange Commission, or the~~ SEC, and The ~~NASDAQ~~Nasdaq Stock Market LLC, impose a number of requirements on public companies, including with respect to corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance and disclosure obligations. Moreover, these rules and regulations have and will continue to increase our legal, accounting and financial compliance costs and make some activities more complex, time-consuming and costly. We also expect that it will continue to be expensive for us to maintain director and officer liability insurance.

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

As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on our internal controls on an annual basis. If we have material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our consolidated financial statements may be materially misstated. We have only recently compiled the systems, processes and documentation necessary to comply with Section 404 of the Sarbanes-Oxley Act. We will need to maintain and enhance these processes and controls as we grow, and we will require additional management and staff resources to do so. Additionally, even if we conclude our internal controls are effective for a given period, we may in the future identify one or more material weaknesses in our internal controls, in which case our management will be unable to conclude that our internal control over financial reporting is effective. ~~Moreover, when we~~We are ~~no longer~~now required to include an ~~emerging growth company,~~attestation report from our independent registered public accounting firm ~~will be required to issue an attestation report~~ on the effectiveness of our internal control over financial ~~reporting.~~reporting annually. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed.

If we are unable to conclude that our internal control over financial reporting is effective, or ~~when we are no longer an emerging growth company,~~ if our auditors were to express an adverse opinion on the effectiveness of our internal control over financial reporting because we had one or more material weaknesses, investors could lose confidence in the accuracy and completeness of our financial disclosures, which could cause the price of our common stock to decline. Irrespective of compliance with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our reported operating results and harm our reputation. Internal control deficiencies could also result in a restatement of our financial results.

We are an emerging growth company and may elect to comply with reduced public company reporting requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.

~~We are an emerging growth company, as defined under the Securities Act~~Table of 1933, or the Securities Act. We will remain an emerging growth company until December 31, 2018, although if our revenue exceeds $1 billion in any fiscal year before that time, we would cease to be an emerging growth company as of the end of that fiscal year. In addition, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our second fiscal quarter of any fiscal year before the end of that five-year period, we would cease to be an emerging growth company as of December 31 of that year. As an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to certain other public companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced financial statement and financial-related disclosures, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirement of holding a nonbinding advisory vote on executive compensation and obtaining stockholder approval of any golden parachute payments not previously approved by our stockholders. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure we may make, there may be a less active trading market for our common stock and our stock price may be more volatile.

Contents

Risks Related to Our Common Stock

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

The trading price of our common stock is likely to continue to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include:

~~actual or anticipated variations in our and our competitors’ results of operations;~~

~~announcements by us or our competitors of new products, commercial relationships or capital commitments;~~

~~changes in reimbursement by current or potential payers, including governmental payers;~~

~~issuance of new securities analysts’ reports or changed recommendations for our stock;~~

~~fluctuations in our revenue, due in part to the way in which we recognize revenue;~~

~~actual or anticipated changes in regulatory oversight of our products;~~

~~developments or disputes concerning our intellectual property or other proprietary rights;~~

~~commencement of, or our involvement in, litigation;~~

~~announced or completed acquisitions of businesses or technologies by us or our competitors;~~

~~any major change in our management; and~~

~~general economic conditions and slow or negative growth of our markets.~~

•

actual or anticipated variations in our and our competitors’ results of operations

•

the global macroeconomic impact of the current COVID-19 outbreak;

•

announcements by us or our competitors of new products, commercial relationships or capital commitments;

•

changes in reimbursement by current or potential payers, including governmental payers;

•

issuance of new securities analysts’ reports or changed recommendations for our stock;

•

fluctuations in our revenue, due in part to the way in which we recognize revenue;

•

actual or anticipated changes in regulatory oversight of our products;

•

developments or disputes concerning our intellectual property or other proprietary rights;

•

commencement of, or our involvement in, litigation;

•

announced or completed acquisitions of businesses or technologies by us or our competitors;

•

any major change in our management; and

•

general economic conditions and slow or negative growth of our markets.

In addition, the stock market in general, and the market for stock of life sciences companies and other emerging growth companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced if the trading volume of our stock remains low. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

If securities or industry analysts issue an adverse opinion regarding our stock or do not publish research or reports about our company, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that equity research analysts publish about us, our business and our competitors. We do not control these analysts or the content and opinions or financial models included in their reports. Securities analysts may elect not to provide research coverage of our company, and such lack of research coverage may adversely affect the market price of our common stock. The price of our common stock could also decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one or more equity research analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

~~Insiders have substantial control over us and will be able to influence corporate matters.~~

AsTable of October 27, 2017, directors and executive officers and their affiliates beneficially owned, in the aggregate, 23% of our outstanding capital stock. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit stockholders’ ability to influence corporate matters and may have the effect of delaying or preventing a third-party from acquiring control over us.Contents

Anti-takeover provisions in our charter documents and under Delaware law could discourage, delay or prevent a change in control and may affect the trading price of our common stock.

Provisions in our restated certificate of incorporation and our amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our restated certificate of incorporation and amended and restated bylaws include provisions that:

~~authorize our board of directors to issue, without further action by the stockholders, up to 5.0 million shares of undesignated preferred stock;~~

~~require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;~~

~~specify that special meetings of our stockholders can be called only by our board of directors, our chairman of the board, or our chief executive officer;~~

establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;

~~establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered terms;~~

~~provide that our directors may be removed only for cause;~~

~~provide that vacancies on our board of directors may, except as otherwise required by law, be filled only by a majority of directors then in office, even if less than a quorum;~~

~~specify that no stockholder is permitted to cumulate votes at any election of directors; and~~

~~require a super-majority of votes to amend certain of the above-mentioned provisions.~~

•

authorize our board of directors to issue, without further action by the stockholders, up to 5.0 million shares of undesignated preferred stock;

•

require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;

•

specify that special meetings of our stockholders can be called only by our board of directors, our chairman of the board, or our chief executive officer;

•

establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered terms;

•

provide that our directors may be removed only for cause;

•

provide that vacancies on our board of directors may, except as otherwise required by law, be filled only by a majority of directors then in office, even if less than a quorum;

•

provide that the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended;

•

specify that no stockholder is permitted to cumulate votes at any election of directors; and

•

require a super-majority of votes to amend certain of the above-mentioned provisions.

In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. Section 203 generally prohibits us from engaging in a business combination with an interested stockholder subject to certain exceptions.

We have never paid dividends on our capital stock, and we do not anticipate paying dividends in the foreseeable future.

We have never paid dividends on any of our capital stock and currently intend to retain any future earnings to fund the growth of our business. In addition, our ~~credit agreement~~Loan and Security Agreement restricts our ability to pay cash dividends on our common stock and we may also enter into credit agreements or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our common stock. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future.

Table of Contents

~~ITEM 5. OTHER INFORMATION~~

On November 3, 2017, the Company entered into a loan and security agreement (the “Loan and Security Agreement”) with Silicon Valley Bank. In connection with the entry into the Loan and Security Agreement, the Company terminated that certain credit agreement (the “Prior Credit Facility”) by and between the Company and Visium Healthcare Partners, LP, dated March 25, 2016 as amended on December 14, 2016, which Prior Credit Facility had a borrowing capacity of $40.0 million, and the loan documents relating thereto. The Prior Credit Facility was terminated as of November 3, 2017, wherein all commitments were terminated, all liens were released and all outstanding principal and interest and fees accrued thereunder were repaid in the aggregate amount of $27.3 million.

The Loan and Security Agreement allows the Company to borrow up to $35.0 million, with a $25.0 million advance term loan (the “Term Loan Advance”) and a revolving line of credit of up to $10.0 million (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 Advance 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 Advance bears interest at a variable rate equal to (i) the thirty-day U.S. London Interbank Offer Rate (“LIBOR”) plus (ii) 4.20%, with a minimum rate of 5.43% per annum. Principal amounts outstanding under the Revolving Line of Credit bear interest at a variable rate equal to (i) LIBOR plus (ii) 3.50%, with a minimum rate of 4.70% per annum. The Company is also required to pay an annual facility fee on the Revolving Line of Credit of $25,000.

The Company may prepay the outstanding principal amount under the Term Loan Advance plus accrued and unpaid interest and, if the Term Loan Advance is repaid in full, a prepayment premium. The prepayment premium will equal (i) $750,000, if the prepayment is made on or before November 3, 2018, (ii) $500,000, if the prepayment is made after November 3, 2018 and on or prior to November 3, 2019 and (iii) $250,000, if the prepayment is made after November 3, 2019. In addition, a final payment on the Term Loan Advance in the amount of $1,187,500 is due upon the earlier of the maturity date of the Term Loan Advance or its payment in full.

The Loan and Security Agreement contains customary representations, warranties, and events of default, as well as affirmative and negative covenants. The negative covenants include, among other provisions, covenants that limit or restrict the Company’s ability to incur liens, make investments, incur indebtedness, merge with or acquire other entities, dispose of assets, make dividends or other distributions to holders of its equity interests, engage in any new line of business, or enter into certain transactions with affiliates, in each case subject to certain exceptions.

The Loan and Security Agreement also requires the Company to comply with certain financial covenants, including maintaining certain revenue levels tested quarterly on a trailing twelve-month basis. However, failure to maintain the revenue levels will not be considered a default if the Company maintains liquidity of at least $40.0 million.

~~The Company’s obligations under the Loan and Security Agreement are secured by substantially all of its assets (excluding intellectual property), subject to certain customary exceptions.~~

~~The net proceeds from the Term Loan Advance were used towards the full repayment of the outstanding balance under the Prior Credit Facility.~~

The foregoing description of the Loan and Security Agreement does not purport to be complete and is qualified in its entirety by reference to the Loan and Security Agreement, a copy of which the Company expects to file as an exhibit to the Company’s Annual Report on Form 10-K for the year ending December 31, 2017.

ITEM 6. EXHIBITS

~~Exhibit~~

~~Number~~

~~Description~~

Incorporated by Reference

Exhibit
Number

Description

Form

File No.

Exhibit

Filing Date

Filed Herewith

10.1*10.1#

~~Second Amendment to Lease Agreement dated August 14, 2017 between the Company and BRI 1868 Riata, LLC.~~Form of stock option award agreement

~~31.1~~

10.2#

Form of stock unit award agreement

31.1

Certification of Principal Executive ~~Officer’s Certification Pursuant~~Officer pursuant to Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

~~31.2~~

31.2

Certification of Principal Financial ~~Officer’s Certification Pursuant~~Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1**

32.1*

Certification ~~Pursuant~~of Principal Executive Officer pursuant to 18 U.S.C. § 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

32.2**

32.2*

Certification ~~Pursuant~~of Principal Financial Officer pursuant to 18 U.S.C. § 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)

~~101.INS~~

101.INS

Inline XBRL Instance Document

~~101.SCH~~ - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL

101.SCH

Inline XBRL Taxonomy Extension Schema

~~101.CAL~~

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

~~101.DEF~~

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase

~~101.LAB~~

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

~~101.PRE~~

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase

104

Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

~~Filed herewith.~~

Indicates compensatory plan or arrangement.

In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the ~~Securities~~ Exchange Act ~~of 1934 (the “Exchange Act”)~~ or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act ~~of 1933~~ except to the extent that the registrant specifically incorporates it by reference.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November ~~6, 2017~~

2, 2020

			VERACYTE, INC.

			~~VERACYTE, INC.~~
By:
	~~By:~~	/s/ KEITH S. KENNEDY
				Keith S. Kennedy Chief Financial Officer ( Principal Financial ~~and Accounting Officer)~~ Officer

~~EXHIBIT INDEX~~



~~Exhibit~~ ~~Number~~		~~Description~~
10.1*		~~Second Amendment to Lease Agreement dated August 14, 2017 between the Company and BRI 1868 Riata, LLC.~~
~~31.1~~		~~Principal Executive Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
~~31.2~~		~~Principal Financial Officer’s Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
32.1**		~~Certification Pursuant to 18 U.S.C. § 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)~~
32.2**		~~Certification Pursuant to 18 U.S.C. § 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)~~
~~101.INS~~		~~XBRL Instance Document~~
~~101.SCH~~		~~XBRL Taxonomy Extension Schema~~
~~101.CAL~~		~~XBRL Taxonomy Extension Calculation Linkbase~~
~~101.DEF~~		~~XBRL Taxonomy Extension Definition Linkbase~~
~~101.LAB~~		~~XBRL Taxonomy Extension Label Linkbase~~
~~101.PRE~~		~~XBRL Taxonomy Extension Presentation Linkbase~~

*		~~Filed herewith.~~
**		In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933 except to the extent that the registrant specifically incorporates it by reference.

Delaware			20-5455398

~~Delaware~~	~~20-5455398~~
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)			Identification No.)



Large accelerated filer o ☒		Accelerated filer x ☐
Non-accelerated filer ☐			Smaller reporting company ☐

~~Non-accelerated filer~~ o	~~Smaller reporting company~~ o

~~(Do not check if a smaller reporting company)~~	Emerging growth company x ☐

		Page No.

	~~Page~~ ~~No.~~
PART I. — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)		1
Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019		1
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Month Periods Ended September 30, ~~2017~~2020 and ~~2016~~2019		2
Condensed Consolidated Statements of Stockholders' Equity for the Three and Nine Month Periods Ended September 30, 2020 and 2019		3
Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, ~~2017~~2020 and ~~2016~~2019		34
Notes to Condensed Consolidated Financial Statements		46
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		1219
Item 3. Quantitative and Qualitative Disclosures About Market Risk		2735
Item 4. Controls and Procedures		2735
PART II. — OTHER INFORMATION
Item 1A. Risk Factors		2936
~~Item 5. Other Information~~		47
Item 6. Exhibits	4963
SIGNATURES		5164


☒
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


☐
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



	September 30, 2017			December 31, 2016
	(Unaudited)			(See Note 1)
Assets
Current assets:
Cash and cash equivalents	$	41,195		$	59,219
Accounts receivable	11,635			8,756
Supplies inventory	3,760			3,475
Prepaid expenses and other current assets	1,617			2,057
Restricted cash	—			120
Total current assets	58,207			73,627
Property and equipment, net	10,281			11,480
Finite-lived intangible assets, net	13,333			14,133
Goodwill	1,057			1,057
Restricted cash	603			603
Other assets	178			134
Total assets	$	83,659		$	101,034
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,161		$	2,424
Accrued liabilities	8,058			9,110
Total current liabilities	11,219			11,534
Long-term debt	24,997			24,918
Capital lease liability, net of current portion	382			599
Deferred rent, net of current portion	4,245			4,402
Total liabilities	40,843			41,453
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding as of September 30, 2017 and December 31, 2016	—			—
Common stock, $0.001 par value; 125,000,000 shares authorized, 33,977,840 and 33,762,278 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively	34			34
Additional paid-in capital	245,430			239,631
Accumulated deficit	(202,648		)	(180,084		)
Total stockholders’ equity	42,816			59,581
Total liabilities and stockholders’ equity	$	83,659		$	101,034



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Revenue	$	17,519		$	18,603		$	52,357		$	46,828
Operating expenses:
Cost of revenue	7,169			6,367			20,426			18,947
Research and development	3,046			4,006			10,679			11,734
Selling and marketing	7,885			7,087			23,215			22,416
General and administrative	5,520			5,763			17,731			18,062
Intangible asset amortization	267			266			800			800
Total operating expenses	23,887			23,489			72,851			71,959
Loss from operations	(6,368		)	(4,886		)	(20,494		)	(25,131		)
Interest expense	(815		)	(799		)	(2,423		)	(1,951		)
Other income, net	134			48			353			127
Net loss and comprehensive loss	$	(7,049	)	$	(5,637	)	$	(22,564	)	$	(26,955	)
Net loss per common share, basic and diluted	$	(0.21	)	$	(0.20	)	$	(0.67	)	$	(0.97	)
Shares used to compute net loss per common share, basic and diluted	33,946,748			27,916,819			33,881,705			27,865,100



	September 30, 2017		December 31, 2016
Accrued compensation expenses	$	4,966	$	6,120
Accrued other	3,092		2,990
Total accrued liabilities	$	8,058	$	9,110



Year Ending December 31,
Remainder of 2017	$	539
2018	2,121
2019	2,227
2020	2,332
2021	2,401
Thereafter	11,856
Total minimum lease payments	$	21,476



	September 30, 2017
Debt principal	$	25,385
Unamortized deferred debt issuance costs	(388		)
Net debt obligation	$	24,997



Year Ending December 31,
2020	$	9,519
2021	12,693
2022	3,173
Total	$	25,385