Biocept
Annual Report 2018

Plain-text annual report

Thanks, M UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K (Mark One)☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2018OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD FROM TO Commission File Number: 001-36284 Biocept, Inc.(Exact name of Registrant as specified in its Charter) Delaware 80-0943522(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.) 5810 Nancy Ridge Drive, San Diego, California 92121(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (858) 320-8200Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which RegisteredCommon Stock, par value $0.0001 per share The Nasdaq Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES ☒ NO ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒ Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act: Large accelerated filer☐Accelerated filer☐ Non-accelerated filer☒ Smaller reporting company☒ Emerging growth company☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on TheNasdaq Stock Market on June 30, 2018, was $13,554,726.The number of shares of Registrant’s Common Stock outstanding as of March 25, 2019 was 18,817,076.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive Proxy Statement for the 2019 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission pursuant to Regulation14A not later than 120 days after the end of the fiscal year covered by this Form 10-K, are incorporated by reference in Part III, Items 10-14 of this Form 10-K. Except for theportions of the Proxy Statement specifically incorporated by reference in this Form 10-K, the Proxy Statement shall not be deemed to be filed as part hereof. TABLE OF CONTENTS Part I Item 1 Business 3 Item 1A Risk Factors 34 Item 1B Unresolved Staff Comments 64 Item 2 Properties 64 Item 3 Legal Proceedings 64 Item 4 Mine Safety Disclosures 64 Part II Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 65 Item 6 Selected Financial Data 65 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 66 Item 7A Quantitative and Qualitative Disclosures About Market Risk 78 Item 8 Financial Statements and Supplementary Data 79 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 114 Item 9A Controls and Procedures 114 Item 9B Other Information 114 Part III Item 10 Directors, Executive Officers and Corporate Governance 115 Item 11 Executive Compensation 115 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 115 Item 13 Certain Relationships and Related Transactions, and Director Independence 115 Item 14 Principal Accounting Fees and Services 115 Part IV Item 15 Exhibits, Financial Statement Schedules 116 Item 16 Form 10-K Summary 116 Signatures 121 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSThis Annual Report on Form 10-K, or Annual Report, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included or incorporated by reference in this AnnualReport other than statements of historical fact, are forward-looking statements. You can identify these and other forward-looking statements by the use ofwords such as “may,” “will,” “could,” “anticipate,” “expect,” “intend,” “believe,” “continue” or the negative of such terms, or other comparableterminology. Forward-looking statements also include the assumptions underlying or relating to such statements.Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forthbelow under the caption “Risk Factors” in Part I, Item 1A and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”in Part II, Item 7 of this Annual Report and elsewhere in this Annual Report. Moreover, we operate in an evolving environment. New risk factors anduncertainties emerge from time to time and it is not possible for us to predict all risk factors and uncertainties, nor can we assess the impact of all factors onour business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements. The forward-looking statements speak only as of thedate on which they are made and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the dateon which they are made except as required by law. Readers should, however, review the factors and risks we describe in the reports we file from time to timewith the Securities and Exchange Commission, or the SEC. 2PART I Item 1. BusinessOverviewWe are an early stage molecular oncology diagnostics company that develops and commercializes proprietary circulating tumor cell, or CTC, and circulatingtumor DNA, or ctDNA, assays utilizing a standard blood sample, or “liquid biopsy.” Our current and planned assays are intended to provide information toaid healthcare providers to identify specific oncogenic alterations that may qualify a subset of cancer patients for targeted therapy at diagnosis, progressionor used for monitoring in order to identify specific resistance mechanisms. Sometimes traditional procedures, such as surgical tissue biopsies, result in tumortissue that is insufficient and/or unable to provide the molecular subtype information necessary for clinical decisions. Our assays, performed on blood, havethe potential to provide more contemporaneous information on the characteristics of a patient’s disease when compared with tissue biopsy and radiographicimaging.Our current assays and our planned future assays focus on key solid tumor indications utilizing our Target-SelectorTM liquid biopsy technology platform forthe biomarker analysis of CTCs and ctDNA from a standard blood sample. Our patented Target-Selector CTC offering is based on an internally developedmicrofluidics-based cell capture and analysis platform, with enabling features that change how information provided by CTC testing is used by clinicians.Our CTC technology could also be validated on cerebral spinal fluid in order to provide information for patients with central nervous system (CNS) tumorsboth primary and metastatic. Our patented Target-Selector ctDNA technology enables detection of mutations and genome alterations with enhancedsensitivity and specificity, and is applicable to nucleic acid from ctDNA, and could potentially be validated for other sample types such as bone marrow,pleural effusions, ascitic fluid, tissue (surgical resections and/or biopsies) or cerebrospinal fluid. Our Target-Selector CTC and ctDNA platforms provide bothbiomarker detection as well as monitoring capabilities and require only a patient blood sample. In January 2019, we began offering Research Use Only, orRUO, liquid biopsy kits containing our patented and proprietary Target Selector testing to laboratories and researchers worldwide.At our corporate headquarters facility located in San Diego, California, we operate a clinical laboratory that is certified under the Clinical LaboratoryImprovement Amendments of 1988, or CLIA, and accredited by the College of American Pathologists, or CAP. We also performed the research anddevelopment that led to our current assays, and continue to perform for our planned assays, at this same facility. In addition, we currently manufacture ourmicrofluidic channels, related equipment and certain reagents, but are currently evaluating outsourcing certain manufacturing activities in the near term toreduce costs and improve efficiency. The assays we offer and intend to offer are classified as laboratory developed tests, or LDTs, under CLIA regulations.CLIA certification is required before any clinical laboratory, including ours, may perform testing on human specimens for the purpose of obtaininginformation for the diagnosis, prevention, or treatment of disease or the assessment of health. In addition, we participate in and have received CAPaccreditation, which includes rigorous bi-annual laboratory inspections and requires adherence to specific quality standards.Our primary sales strategy is to engage medical oncologists and other physicians in the United States at private and group practices, hospitals, laboratoriesand cancer centers. In addition, we market our clinical trial and research services to pharmaceutical and biopharmaceutical companies and clinical researchorganizations. Additionally, commencing in October 2017, our pathology partnership program, branded as Empower TCTM, provides the unique ability forpathologists to participate in the interpretation of liquid biopsy results and is available to pathology practices and hospital systems throughout the UnitedStates. Further, sales to laboratory supply distributors of our proprietary blood collection tubes, or BCTs, commenced in June 2018, which allow for the intacttransport of liquid biopsy samples for RUO from regions around the world.Our revenue generating efforts are focused in three areas: •medical oncologists, surgical oncologists, urologists, pulmonologists, pathologists and other physicians who use the biomarker informationwe provide in order to determine the best treatment plan for their patients; •providing laboratory services utilizing both our CTC and ctDNA testing in order to help pharmaceutical and biopharmaceutical companiesdeveloping drug candidate therapies to treat cancer; and •licensing and/or selling our proprietary testing and/or technologies to partners in the United States and abroad.3We plan to grow our business by directly offering medical oncologists, surgical oncologists, pulmonologists, pathologists and other physicians our Target-Selector liquid biopsy CTC and ctDNA assays. Based on our product development data, as well as discussions with our collaborators, we believe that ourplanned future assays should provide important information and clinical value to physicians. In particular, CTC and ctDNA assays could deliver important,actionable information not provided by other assays. For example, the historic clinical CTC test is the United States Food and Drug Administration, or FDA,approved CellSearch® test (formerly Janssen Diagnostics, now owned by Menarini Silicon Biosystems), which provides CTC enumeration, but is not FDAapproved to perform biomarker analysis. We believe our ability to rapidly translate research insights about the utility of cytogenetic, immunocytochemicaland molecular biomarkers to provide information to medical oncologists, surgical oncologists, urologists, pulmonologists, pathologists and other physiciansfor treatment decisions in the clinical setting will improve patient treatment and management, and that these assays will become a key component of thestandard of care for personalized cancer treatment. Market OverviewCancer Market OverviewDespite many advances in the treatment of cancer, it remains one of the greatest areas of unmet medical need. According to the World Cancer Report 2014,cancers figure among the leading causes of morbidity and mortality worldwide, and according to the World Health Organization, there were approximately14 million new cases and 8.8 million cancer related deaths in 2015. The number of new cases is also expected to rise by approximately 70% over the next twodecades. According to the World Health Organization, the most common causes of cancer death are cancers of the lung (21%), liver (10%), colon (9%),stomach (9%), and breast (7%). The incidence of, and deaths caused by, the major cancers are staggering. According to the National Cancer Institute, therewere approximately 266,000 new cases of breast cancer and approximately 234,000 new cases of lung cancer diagnosed in the United States in 2018, withover 3.9 million patients who have had a diagnosis of these cancers and are either living with these diseases and are undergoing treatment or are beingmonitored. For example, in breast cancer, many women have been deemed cancer-free, but continue to undergo periodic monitoring to assure there has beenno disease recurrence. Our commercialized assays and our other planned future assays only require a readily accessible standard blood sample and thus maybe used to help manage these patients, including supporting the selection of appropriate treatment, at multiple time points during the course of their disease.Because our assays require only a standard blood sample, they can be particularly useful when there is no currently available biopsy or surgical material, as isoften the case in lung cancer, even at the time of initial evaluation. This is also the case with breast and lung cancers once surgical resection of the tumor hastaken place and treatment has been initiated. Patients with breast and lung cancer must often undergo surgical resection of their primary tumor as part of theirtreatment. Therefore, at the time of progression or recurrence there may be no ability to obtain a tissue biopsy. Additionally, many studies have shown thatmost tumors mutate during treatment and as the disease progresses, so information from the initial tumor tissue may not be relevant. Again, a significantbenefit of our technology is that it allows physicians to assess the current status of the tumors on a real-time basis utilizing a standard blood sample or liquidbiopsy.4The following data published by the National Cancer Institute shows estimated new cases and deaths for 2017, and prevalence in 2013, in the United Statesfor the major solid cancers types: Cancer Type Est. Incidence(New Cases/Year-2017) Est. Mortality(Deaths/Year-2017) Est. Prevalence(Diagnosed andAlive as of 2013)** Bladder 79,030 16,870 708,444 Breast* 252,710 40,610 3,418,124 Cervical 12,820 4,210 257,524 Colorectal* 95,520 50,260 1,332,085 Endometrial 61,380 10,920 *** Gastric* 28,000 10,960 82,256 Kidney 63,990 14,000 505,380 Lung* 222,500 155,870 541,035 Melanoma* 87,110 9,730 1,332,085 Ovarian 22,440 14,080 224,940 Pancreatic 53,670 43,090 68,615 Prostate* 161,360 26,730 3,120,176 Thyroid 56,870 2,010 765,547 *Areas where we currently have assays or active development programs.**Includes active disease and disease-free.***National Cancer Institute data is unavailable for 2013. 2010 data indicates an estimated prevalence of 600,346.In addition to the human toll, the financial cost of cancer is overwhelming. An independent study published in 2010 and conducted jointly by the AmericanCancer Society and LIVESTRONG ranked cancer as the most economically devastating cause of death in the world - estimated to be as high as $1.4 trillionglobally. According to the National Cancer Institute, the direct cost of cancer care in the United States in 2017 was over $147 billion.Cancer is a Heterogeneous DiseaseCancer constitutes a heterogeneous class of diseases, characterized by uncontrolled cell growth that results from a combination of both environmental andhereditary risk factors. Many different tissue types can become malignant, such as breast, lung, liver, and skin, and even within a particular tumor there isheterogeneity, with certain cancer cells in a patient bearing specific cellular or genetic biomarkers which others lack. Only in recent years has technologyprogressed sufficiently to enable researchers to understand many cancers at a cellular and molecular level, attribute specific cancers to associated geneticchanges, and determine the extent to which these changes are seen in a patient’s tumor.Cancer cells contain genetic alterations compared to normal human cells. Common genetic abnormalities correlated to cancer include gains or losses ofgenetic material on specific chromosomal regions, or loci, or changes in specific genes, or mutations, which ultimately result in detrimental cellular changesfollowed by cancerous or pre-cancerous conditions. For example, multiple gains or losses on various chromosomes, and the rearrangement of genetic materialamong chromosomes, or chromosomal translocations, have been observed in different cancer types, such as HER2 in breast cancer and ALK rearrangementsin NSCLC. In addition, mutations within gene sequences, or single nucleotide variations, can give rise to aberrant proteins that do not perform their functionscorrectly, leading to uncontrolled cell growth. Such genetic alterations can be a result of multiple factors, including genetic predisposition, environmental orlifestyle factors or viral infections. Importantly, these genetic changes or aberrant proteins can be used as biomarkers to help guide appropriate treatment.Detecting these biomarkers, particularly those representing drug targets, or those indicative of responsiveness or resistance of a tumor’s cells to specifictherapies, helps clinicians to select drugs, design treatment regimens and optimize patient care and management. Assays that provide such predictiveinformation have the potential to dramatically improve treatment outcomes for patients suffering from cancer.5Limitations of Traditional Cancer Diagnostic and Profiling ApproachesCancer is difficult to diagnose and manage due to its heterogeneity at morphologic, genetic and clinical levels. Traditional methods of diagnosis for solidtumors, routinely used as the initial step in cancer detection, involve a tissue biopsy followed by a pathologist examining a thin slice of potentiallycancerous tissue under a microscope. A recently obtained tissue sample is used in combination with chemical staining techniques to enable analysis of thebiopsy. After staining, the pathologist determines through visual inspection whether the biopsy contains normal or cancerous cells, with those that aredeemed cancerous being graded on a level of aggressiveness. Often an analysis of biomarkers relevant to that tumor type is also performed on the tissue,ranging from IHC to FISH, to mutation analysis by various means such as microarrays and sequencing. After the diagnosis, a clinical workup is performedaccording to established guidelines for the specific cancer type. From there, the physician determines the stage of progression of the cancer based on a seriesof clinical measures, such as size, grade, metastasis risk, symptoms and patient history, and decides on a treatment plan that may include surgery, watchfulwaiting, radiation, chemotherapy, or stem cell transplantation.This type of analysis is dependent on the availability of a recently obtained tissue biopsy for the pathologist to analyze. Such a biopsy is often not available.A tumor may not be readily accessible for biopsy, a patient’s condition may be such that a biopsy is not advised, and for routine periodic patient monitoringto evaluate potential progression or recurrence, a biopsy is a fairly invasive procedure and not typically performed. As the length of time between when theoriginal biopsy, diagnosis or surgery is conducted to the current evaluation of the patient increases, the likelihood that an original biopsy specimen is trulyrepresentative of the current disease condition declines, as does the usefulness of the original biopsy for making treatment decisions. This risk intensifies insituations where a drug therapy is being administered, because the drug can put selective pressure on the tumor cells to adapt and change.Similarly, the heterogeneity referred to above means that different parts or areas of the same tumor can have different molecular features or properties. Inevaluating a biopsy specimen, the pathologist will take a few thin slices of the tumor for microscopic review rather than exhaustively analyzing the wholetumor mass. The pathologist can only report on the tumor sections analyzed and if other parts of the tumor have different features, such as biomarkerscorresponding to specific treatments, they can be missed. A more representative analysis of the entire tumor, as well as any metastases if they are present, isvery helpful.CTCs, ctDNA and CancerCTCs are cancer cells that have detached from the tumor matrix and entered the patient’s blood or other bodily fluids. These cells are representative of thetumor and its metastases and can function as their surrogates. Testing CTCs can complement pathologic information drawn from a biopsy or resected tissuesample, helping to ensure that the analysis is comprehensive and not biased by tumor heterogeneity and sampling issues. They can also provide critical datawhen a biopsy is not possible. Clinical studies have demonstrated that the presence and number of CTCs provides information on the likely course of certaintypes of disease for the cancer patient, or in other words they are considered “prognostic.” Since CTCs are representative of the tumor, they can also be usedfor biomarker analysis, such as helping to guide therapy selection. Such analyses are “predictive” in that they offer insight into the likely responsiveness orresistance to particular therapies. After surgery and during any subsequent therapy or monitoring period, blood samples can periodically be drawn in astandard manner and analyzed to evaluate a therapy’s continuing effectiveness, as well as to detect other biomarkers such as new genetic mutations that mayarise as a result of selection pressure by a particular therapy or by chance. Physicians can use this information to determine which therapy is most likely tobenefit their patients at particular times through the course of their disease. Treatment decisions based on patient-specific information are the foundation ofpersonalized medicine, and assays that guide a physician in the selection of individualized therapy for a patient are termed “predictive assays.”ctDNA is nucleic acid that is released into blood by dying tumor cells. Cell death occurs in all tissues, especially those that are rapidly dividing, and incancer, where cell growth is not only rapid but also uncontrolled. Parts of tumors often outgrow their blood supply, resulting in cell death. Tumor cells dyingas a result of therapy also release nucleic acid into blood. As a consequence, ctDNA is common in cancer patients and scientists believe that like CTCs, itmay be more representative of a patient’s entire tumor than a few thin sections from a tissue biopsy, thus reducing the heterogeneity problem. ctDNA is foundin the plasma component of blood and is readily accessible in a standard blood sample. Analyzing ctDNA for mutations that are used as biomarkers fortherapy selection shows great promise. One of the strengths of this approach, in addition to not requiring a tissue biopsy, is that it is not dependent oncapturing rare tumor cells from blood to provide a sample for testing. The difficulty with this approach is that the cellular context is lost since the ctDNA ismixed with a much larger amount of6circulating DNA from normal cells that are continuously dying and being replaced in the body, thus making analysis challenging. This requires a mutationdetection methodology with enhanced sensitivity and specificity, to distinguish mutations in particular gene regions in cancer cells from the normal genesequence present in those same genes in normal cells which co-exist in blood as normal cells die and are replaced in the body. Our Target-Selectortechnology provides this necessary sensitivity and specificity and creates an opportunity for ctDNA analysis to complement CTC analysis, or potentially toserve as the platform for stand-alone assays.Given the incidence of cancer in the United States, with an estimated 1,700,000 new cases in 2018 for the major solid tumors targeted by our planned futureassay products, the markets for our current and planned future cancer diagnostic assays are very large. Furthermore, these market opportunities are evengreater due to the benefits of CTC and ctDNA testing, including not only the ability to offer physicians a simple way to augment an initial tumor biopsyanalysis but also to provide a means for relatively frequent monitoring of the tumor’s molecular status, utilizing a standard blood sample as a “liquid biopsy.”The latter application enables the physician to determine if or how a tumor is changing over time or is responding to therapy and what the next treatmentshould be. For example, in the United States, the incidence of new cases of breast cancer alone is estimated to be over 266,000 in 2018, and the prevalence ofthis disease is over 2.8 million (the number of women with a history of breast cancer in the United States, including women being treated and women whohave finished treatment), with an estimated 330,000 lumpectomies performed annually in the United States. Of these lumpectomies, 20% need to be repeatedbecause on pathological examination it is shown the procedure did not result in “clean margins,” thus suggesting the entire tumor was not removed,according to a Johns Hopkins report. If a CTC assay were performed at the time of initial diagnosis, at the time of surgery, or in lieu of, or as an adjunct to, aPET/CT scan (as a CTC assay has the potential to identify a single tumor cell in a blood sample, while a scan requires a tumor mass of millions of cells to bedetectable), to monitor disease progression or test for recurrence, thousands of assays, in breast cancer alone, could be performed per year with still relativelylow market penetration.Use of CTC- and ctDNA-Derived Biomarker Data in Cancer TreatmentCTCs and ctDNA are derived from, and are understood to be representative of, a solid tumor and its metastases and can be analyzed as adjuncts to or in placeof the tumor, especially when a recent tumor biopsy is not available. This is also referred to as a liquid biopsy. In theory, almost any analysis that can beperformed on tumor tissue can also be performed on CTCs, while ctDNA, because it is only nucleic acid, is more limited. We have focused our analysis ofCTCs and ctDNA on known biomarkers associated with specific therapies to support treatment decisions and therapy selection made by physicians. Thebiomarkers we analyze consist of proteins or protein modifications that can be identified by immunocytochemical means, cytogenetic or chromosomalaberrations, which are detected by FISH. Gene mutations in CTCs or ctDNA are detected by molecular diagnostic assays, including Target-Selectortechniques and gene sequencing. Specific examples include (i) for ICC, the detection of the estrogen receptor protein in breast cancer, indicative of the likelyresponsiveness to hormonal therapies like tamoxifen, often sold under the trade name Nolvadex®, (ii) for FISH, the presence of an amplified HER2 gene inbreast cancer, indicative of the likely responsiveness to HER2-targeted agents like trastuzumab, often sold under the trade name Herceptin®, and (iii) formutation detection, the presence of an EGFR activating mutation in NSCLC like L858R, indicative of the likely responsiveness to EGFR-targeted agents likeTarceva®. All of these biomarkers are currently tested on tumor tissue and can be tested on CTCs, and in the latter case on ctDNA. The resulting informationcould then be used to guide patient care, and specifically treatment selection.To date, these types of molecular and genetic detection methods have been successfully utilized to provide predictive information for several cancersincluding breast, colon, NSCLC, melanoma and others in the form of companion diagnostics, typically performed on tumor tissue. CTC and ctDNA assays,which analyze the same biomarkers in a more convenient standard blood sample test that also permits periodic monitoring, could be used in the same way. Our Business StrategyWe provide medical oncologists, surgical oncologists, pulmonologists, urologists, integrated oncologists, naturopathic doctors, pathologists and otherphysicians with a straightforward means to profile and characterize their patients’ tumors on a real-time basis by analyzing CTCs and ctDNA found instandard blood draws. Biomarkers are currently detected and analyzed primarily in tissue biopsy specimens. We believe that our technology, which not onlyprovides information on CTC enumeration but also the assessment of treatment-associated biomarkers identified within the CTCs or in ctDNA, will provideinformation to physicians that improves patient treatment and management and will become a key component of the standard of care for personalized cancertreatment.7Our approach is to develop and commercialize CTC and ctDNA assays and services that enable us to offer standard blood sample based, real-time testingsolutions for a range of solid tumor types to oncologists that improve patient treatment with better prognostic and predictive tools. To achieve this, we intendto:•Develop and commercialize a portfolio of proprietary CTC and ctDNA assays and services, to enable physicians to develop personalized treatmentplans. We intend to continue the development of additional prognostic and predictive assays and services to provide information that is essential topersonalized cancer treatment. By including predictive information on biomarkers associated with specific therapies in our analysis in addition toCTC enumeration, our assays are designed to provide a more complete profile of a patient’s disease than existing CTC tests. The biomarkerinformation will assist physicians in selecting appropriate therapies for individual patients. Our ctDNA assays are expected to offer enhancedsensitivity and specificity based on the Target-Selector technology, enabling earlier detection of therapy-associated mutation targets or resistancemarkers, again supporting treatment decisions. We have launched our Target-Selector offering in a number of key indications such as breast cancer,lung cancer, gastric cancer, colorectal cancer, prostate cancer, and melanoma, which are performed in our CLIA-accredited testing facility. We plan toperform the necessary validation studies to allow us to commercialize these assays through our clinical laboratory.•Scale our internal sales and marketing capabilities. Our direct sales force with specialized experience in cancer diagnostic testing focuses on keyidentified territories in order to provide geographic coverage throughout the United States. At December 31, 2018, we had 10 sales representatives,and depending on our assay volume, we expect to increase this group to 20-25 within two years and potentially 30-35 within five years. This teamwill educate physicians directly on the benefits of our assays and the clinical data supporting them, as well as provide support to and serve astechnical specialists for our partners. In addition to our internal efforts, we are actively seeking commercial partnerships that can increase our marketreach.•Develop and expand our collaborations with leading university hospitals and research centers. We collaborate with key thought leaders, physiciansand clinical researchers, including those at Sarah Cannon Research Institute, University of Colorado, the University of California, San Diego, the JohnWayne Cancer Institute, Columbia University, Johns Hopkins Medical Institute, MD Anderson Cancer Center, Oregon Health Sciences University,Yale University, Dana Farber Cancer Center, St Luke’s Health System, Vanderbilt University, University of Texas Southwestern Medical Center, andGeorgetown University. Our collaborations enable us to test new technologies, validate the effectiveness and utility of our planned future assays in aclinical setting and provide us access to clinically well-characterized and highly annotated patient data. These samples and data accelerate ourvalidation process and facilitate the testing and refinement of our planned new assays.•Enhance our efforts in reaching and educating medical oncologists, surgical oncologists, urologists, pulmonologists, pathologists and otherphysicians about CTC and ctDNA assays. According to the State of Cancer Care in America 2014 Report, published in the Journal of OncologyPractice in March 2014, there were approximately 13,400 medical oncologists in the United States or 16,500 if gynecologic and pediatric oncologistsare included. With the support of our key thought leader collaborators, we intend to focus on medical oncologists, surgical oncologists, urologists,pulmonologists, pathologists and other physicians who treat cancer patients by targeting our sales and marketing efforts on this important customersegment. We believe this will expand and optimize the oncology testing services and personalization of cancer treatment provided by medicaloncologists, surgical oncologists, urologists, pulmonologists, pathologists and other physicians so that they can better serve their cancer patients.•Increase our efforts to provide biopharmaceutical companies and clinical research organizations with our current and planned CTC and ctDNA assaysand services. In an effort to improve the outcome of clinical trials for oncology drugs, and more rapidly advance targeted therapeutics, pharmaceuticaland biopharmaceutical companies are increasingly looking to companies that have cancer diagnostic assays that specifically address their needs,including the ability to characterize and monitor a patient’s tumor over time using CTC and ctDNA assays to analyze biomarkers of interest. There areover 5,000 active trials in the United States in breast, lung, colorectal, prostate and gastric cancers and melanoma according to clinicaltrials.gov. Weexpect to increase our sales and marketing focus in this business as well as seek additional collaborations and partnerships with diagnostic,pharmaceutical and biopharmaceutical companies. •Become an enabling technology to cancer targeted therapies. Biopharmaceutical companies will increasingly focus on the personalized cancerdiagnostic sector as the potential and prevalence of molecularly targeted oncology therapies approved by the FDA along with companion diagnosticsincreases. As targeted therapies move into their next phase, the market is beginning to see next generation of drugs such as Astra Zeneca’s Tagrisso(Osimertinib) that work after a patient on targeted therapy begin to progress and show a resistance mechanism that is identifiable / targetable, in this8case a mutation in EGFR known as T790M. With these drugs, the original biopsy tissue would not show the resistance mechanism, so the patient musteither undergo a re-biopsy procedure. In many cases re-biopsy is not medically feasible and liquid biopsy offers a more cost effective and saferalternative in this application. Another area of interest for the pharmaceutical industry is in immuno-oncology. This is the challenge of helping thebody to counter the cancer cell’s ability to evade the immune system. Several protein-based tests are being developed in tissue to work ascomplimentary or companion diagnostics to these new and promising drugs, but the use of these tests will be limited as a result of limitations of tissuebiopsies. Another solution would be to test for these proteins with a liquid biopsy-based CTC test rather than relying on tissue biopsies.•Conduct additional clinical studies with our current CTC and ctDNA assays and assays we plan to introduce in various cancer types. Clinical utilityand validation studies for our planned ctDNA assays may rely on archived plasma or blood samples from clinical trials in which patient outcomes arealready available, in a retrospective-prospective design that significantly shortens the length of such studies.•Continue to enhance our current and planned future CTC and ctDNA assays and reduce the costs associated with providing them through internalresearch and development and partnering with leading technology developers and reagent suppliers. We intend to work closely with select keytechnology developers and suppliers to further automate the optical interpretation of our current assays and our planned additional CTC assays,including enumeration, immunocytochemical biomarker staining and FISH. We have and currently utilize an automation system that significantlyreduces the hands-on time of our cytogenetic technologists for microfluidic channel analysis while increasing the uniformity of the data we generate.This system is also expected to provide the ability to evaluate multiple fluorescent signals of different wavelengths simultaneously for multiplexedanalysis, further enhancing efficiency.Our Competitive AdvantagesWe believe that the competitive advantages of our molecular assays, including our assays which are still under development, would include the following.Our current Target-Selector molecular assays enable, and we anticipate our planned future CTC and ctDNA assays will each enable, detailed analysis of apatient’s cancer utilizing a standard blood sample, facilitating testing at any time, including when a biopsy is not available or inconclusive, offering real-time monitoring of the cancer and the response of the cancer therapy, and allowing medical oncologists, surgical oncologists, pulmonologists, urologists,integrative oncologists, naturopathic doctors and pathologists and other physicians to select timely modifications to treatment regimens. Because CTCsand ctDNA are derived from the primary tumor or its metastases, they function as surrogates for the tumor, with the advantage of being readily accessible in astandard blood sample. This is especially important in situations where a biopsy is not available or advised. The simplicity of obtaining a standard bloodsample permits repeat testing in a monitoring mode to detect recurrence or progression and to offer information on treatment modifications based on a currentassessment of the cancer’s properties. A key advantage to using Biocept is our ability to interrogate both CTC and ctDNA biomarker targets.Our current Target-Selector assays each provide and we anticipate our planned future assays will each provide more information than competitors’ existingtests, as a result of being able to provide biomarker results for both ctDNA and CTCs. We anticipate that such additional biomarker information will enable aphysician to develop a personalized treatment plan. By including biomarker information in our analysis, in addition to CTC enumeration, our current assaysand our planned future assays are designed to provide a more complete profile of a patient’s disease than existing CTC or ctDNA. We intend for our assays tocontain actionable information to assist physicians in selecting appropriate therapies for individual patients. Our ctDNA assays are expected to offerenhanced sensitivity and specificity based on our patented technology, enabling earlier detection of therapy-associated mutation targets or resistancemarkers, again supporting treatment decisions.9Our current Target-Selector and our planned future assays are designed to capture and detect a broader range of CTCs than existing tests and to beapplicable to, or quickly modifiable for, a wide range of cancer types. Our antibody capture cocktail includes antibodies targeting not only EpCAM, thetraditional epithelial CTC capture antigen utilized in the CellSearch® system and in other platforms, but also other epithelial antigens as well asmesenchymal and cancer stem cell antigens, indicative of cells having undergone the epithelial-to-mesenchymal transition. These cells may be more relevantfor metastasis. Our detection methods include cytokeratin staining with a broader range of cytokeratin isotypes than existing CTC tests, and we haveintroduced additional staining which would enable detection of cells specifically captured with our antibody cocktail, including EMT cells lackingcytokeratin. We believe that through our enhanced staining, more CTCs and different types of CTCs will be able to be identified and potentially at earlierstages of disease, resulting in fewer non-informative cases and more information for physicians.Our current and planned CTC and ctDNA Target-Selector assays will be flexible and readily configurable to accommodate new biomarkers with clinicalrelevance as they are identified. In theory, our platforms permit essentially any analysis that is currently performed on tumor tissue to be performed on CTCs,including immunocytochemical staining, FISH and molecular analysis. As new therapies are approved, and to the extent that they are targeted therapies forwhich knowledge of a particular gene amplification event, mutation or presence, absence or modification, such as phosphorylation, of a protein are indicativeof likely response or resistance to that therapy, we will be able to include them in our assays with minimal changes. This is attractive to pharmaceutical andbiotechnology companies that are developing such therapies or seeking ways to make their clinical trials more efficient, as this flexibility enables them tofocus on patients more likely to respond to a particular therapy and demonstrate a benefit from that therapy.Collaborative relationships with physicians at MD Anderson Cancer Center, Yale University, Oregon Health Sciences University, Sarah Cannon ResearchInstitute, University of Colorado, the University of California, San Diego, the University of Minnesota, the John Wayne Cancer Institute, ColumbiaUniversity, Johns Hopkins Medical Institute, Vanderbilt University, University of Texas Southwestern Medical Center, St. Josephs of Orange, St. Luke’sCancer Center, and Georgetown University. We have worked closely with a number of physicians at institutions on various collaborative projects indifferent cancer types including breast, NSCLC, prostate, colorectal, ovarian, bladder, renal and endometrial. These projects provide us access to leadingresearchers, clinicians and key thought leaders, access to valuable patient samples and insight into clinical applications for our assays. Some of these projectshave resulted in publications in leading journals, such as Cancer Discovery and Cancer Medicine, which enhances our standing in the oncology communityand supports our marketing efforts.Our planned Target-Selector mutation assays would not be platform dependent. These assays are being designed to be able to be performed on almost anymolecular instrument, which will provide flexibility in laboratory operations. To the extent we elect to develop these assays as IVDs, including by pursuingCE marks for such assays to be marketed outside the United States, the ability to rapidly deploy them on different approved instrument platforms already inmany laboratories should greatly simplify their distribution and commercialization.Our Assays, Products and ServicesAssays, Products and ServicesWe currently offer and conduct our commercialized diagnostic assays and offer our clinical trial services at our CLIA-certified, CAP-accredited and state-licensed laboratory. We have commercialized our Target-Selector assays for a number of solid tumor indications such as: breast cancer, NSCLC, gastriccancer, colorectal cancer, prostate cancer, melanoma, pancreaticobiliary cancer, and ovarian cancer. These assays utilize our dual CTC and ctDNAtechnology platforms and provide biomarker analysis from a patient’s blood sample.Our current assays and our planned near-term cancer diagnostic assays and clinical trial services include:•CTC and ctDNA Testing. Our current assays and our other planned cancer diagnostic assays are based on our Target-Selector technologies and arecurrently intended to be performed only in our clinical laboratory. After completing testing, we or our partners provide our customers with an easy tounderstand report that describes the results of the analyses performed, which is designed to help medical oncologists, surgical oncologists, urologists,pulmonologists, pathologists and other physicians make better decisions about the treatment of their patients.10•Clinical Trial Services. We plan to utilize our clinical laboratory and translational research capabilities to provide clinical trial and research servicesto pharmaceutical and biopharmaceutical companies and clinical research organizations to improve the efficiency and economic viability of theirclinical trials. Our clinical trials and translational research services could leverage our knowledge of CTCs and ctDNA and our ability to develop andimplement new cytogenetic, immunocytochemical and molecular diagnostic assays. Our current assays can, and our other planned cancer diagnosticassays and biomarker assays are anticipated to be able to, help optimize clinical trial patient selection, and as a result potentially improve thelikelihood of success of the clinical trial. With positive results in a clinical trial, our assays would more easily then move into standard clinicalpractice, helping physicians select the most appropriate therapy for their patients.In the case of our breast and gastric cancer offerings, biomarker analysis involves fluorescence in situ hybridization, or FISH, for the detection andquantitation of the human epidermal growth factor receptor 2, or HER2, gene copy number as well as immunocytochemical, or ICC, analysis of estrogenreceptor, or ER, protein, progesterone receptor, or PR, protein, and androgen receptor, or AR, protein, which are currently commercially available. A patient’sHER2 status provides the physician with information about the appropriateness of therapies such as Herceptin® or Tykerb®. ER and PR status provides thephysician with information about the appropriateness of endocrine therapies such as tamoxifen and aromatase inhibitors. Our lung cancer biomarker analysis offering currently includes FISH testing for ALK, ROS1, RET, MET and FGFR1 gene rearrangements, as well as analysisfor the T790M, Deletion 19, and L858R mutations of the epidermal growth factor receptor, or EGFR gene, as well as BRAF, KRAS and NRAS. The L858Rmutation of the EGFR gene and Exon 19 deletions as activators of EGFR kinase activity are associated with the use of the drugs Tarceva®, Gilotrif® andIressa®. For lung cancer, we also offer a resistance profile assay consisting of the biomarkers MET, HER2 (both of which we perform using our technology forCTCs), KRAS, and T790M (both of which are performed using ctDNA in plasma). These assays can be used by physicians to identify the mechanism causingdisease progression for patients with NSCLC who are being treated with tyrosine kinase inhibitor, or TKI, therapy and therefore may qualify patients forinclusion in a clinical trial. In November 2015, Tagrisso® was approved by the FDA, providing another biomarker-based therapy for the treatment of patientswith EGFR-related lung cancer. Tagrisso® is indicated for the treatment of patients with metastatic disease, who have progressed on or after EGFR TKItherapy, and who have acquired a T790M resistance mutation. Recently, the FDA approved the combination of Novartis’ Tafinlar® (dabrafenib) andMekinist® (trametinib) for the treatment of patients with metastatic NSCLC whose tumors express the BRAF V600E mutation, an FDA “breakthroughtherapy” designation for patients who have received prior chemotherapy. This combination was approved in Europe for the same indication in March 2017.BRAF mutations, which appear in approximately 1-3% of NSCLC cases globally, are associated with Zelboraf® and Tafinlar® treatment, as these BRAFinhibitors are both approved for the treatment of patients with melanoma.Fibroblast growth receptor 1, or FGFR1, amplification is offered using our CTC technology. FGFR1 is present in several tumor types, including both NSCLCand small cell lung cancer, or SCLC, and has been shown to be a prognostic indicator of progression. FGFR1 is also a key target for several drugs undergoingclinical development.We analytically validated PD-L1 testing utilizing our CTC technology in 2016. PD-L1 is a biomarker that is informative for immuno-oncology therapiescurrently marketed for lung cancer and melanoma, as well as therapies in development for multiple tumor types. We collaborated with David Rimm, M.D.,Ph.D., a pathologist at Yale Medical School and a scientific advisor to us, on the analytical development of this assay.We plan to release additional blood-based biomarker assays, such as those that test for ESR1, to our current menu of liquid biopsy assays using bloodsamples. In addition, we plan to complete the development and offer multiplexed biomarker tests, which will allow the detection and quantitative monitoringof multiple biomarkers in a single assay.In August 2017, we announced that we had executed a distribution agreement for our proprietary blood collection tubes with VWR International, LLC whichcan preserve intact cells (such as CTCs) for up to 96 hours and ctDNA for up to 8 days, allowing for the intact transport of RUO liquid biopsy samples fromregions around the world.In October 2017, we launched our pathology partnership initiative, branded as Empower TC, expanding access of our proprietary liquid biopsy testing tocommunity pathologists and hospitals throughout the United States. The aim of this program is to incorporate community pathologists into the review ofbiomarkers found in liquid biopsy for patients diagnosed with cancer. Pathologists are now enabled to interpret our liquid biopsy results locally, whilepatient specimens will continue11to be sent to us for processing in our CLIA-certified, CAP-accredited high complexity laboratory. In February 2019 we launched Version 2 of Empower TCwhich is intended to expand the capabilities of the program to allow for more tests to be interpreted by local pathologists.We intend to continue to commercialize cancer diagnostic assays in the United States as LDTs performed in our CLIA-certified, CAP-accredited, and state-licensed laboratory. We plan to evaluate potential opportunities for the commercialization of our products in other countries. We believe the Target-Selectortechnology can be used for molecular biomarker screening, marked as RUO test kits.We launched the first of our RUO Target Selector kit products, ctDNA EGFR, in January 2019. Additionally, we plan to evaluate opportunities for licensingof our products and proprietary technologies to partners in the United States and abroad.In December 2018, we entered into a Software License and Laboratory Data Supply Agreement with Prognos, Inc., an innovator in predicting disease byapplying artificial intelligence (AI) to clinical laboratory diagnostics. Under the agreement, we will supply de-identified data from its liquid biopsy testing toPrognos, which will leverage its AI capabilities to help its pharmaceutical clients ensure that the right patients receive the right therapies. This agreementcould provide revenue sharing opportunities in future periods.We also expanded our prostate panel offerings as a key element for growing the demand for our testing among urologists, including the AR-V7 assay whichhelps physicians determine if patient should stay on hormone therapy or switch to chemotherapy, as well as PTEN, MET, MYC, and EGFR assays whichprovide valuable prognostic information to the aggressiveness of a patient’s prostate cancer.Pharmaceutical, Research and Health Economic CollaborationsWe continue to execute on our strategies intended to expand our business globally, as well as to engage with pharmaceutical companies on clinical trials andassay development. We have preferred provider agreements in place in Mexico with Quest Diagnostics to support testing for Astra Zeneca. In addition, wehave distribution agreements in place in Mexico, Uruguay, Turkey, the Czech Republic, Columbia, Israel and Canada.In March 2013, we published a study in Cancer Medicine in collaboration with a group of breast cancer surgeons, pathologists and basic researchers at TheUniversity of Texas MD Anderson Cancer Center. In this study, our assay, and a version adapted for use with bone marrow samples, demonstrated the abilityto identify HER2 positive CTCs and disseminated tumor cells (DTCs) seen in the bone marrow of patients who had been previously classified as HER2negative by tumor tissue analysis. A HER2 positive result in a patient with breast cancer provides an indication to the physician that there is likely to be asurvival benefit from treatment with Herceptin®, as demonstrated in a number of large clinical studies.As a follow up to the CTC findings published in Cancer Medicine, we were involved in a clinical study led by investigators at the Dana-Farber CancerInstitute. Study enrollment was completed. During the screening phase of this study, our CLIA-certified, CAP accredited laboratory tested blood samples froma cohort of patients with HER2 negative tissue status, with the aim to identify those patients that have individuals with HER2 positive CTCs. These patientswere then assigned to chemotherapy plus Herceptin®. Additional CTC testing with HER2 FISH biomarker analyses were performed at subsequent timepoints. At the December 2014 San Antonio Breast Cancer Symposium, we presented findings of 311 patients tested with HER2 negative tissue status, where22% had CTCs with HER2 gene amplification at disease progression. HER2 gene amplification subsequently categorized these patients as potentialcandidates for anti-HER2 therapy as the cancer evolved. Moreover, our multi-antibody CTC capture method identified a substantial subset of patients whowould not likely have had detectable CTCs with commonly used CTC capture technologies. This added 10% (included in the 22%) to the number of womenwho were candidates for this highly specific targeted therapy.12With our cooperation, researchers at Columbia University published a study in the journal Clinical and Translational Oncology in January 2015. The studydemonstrated the high correlation (79%) of circulating tumor cells, primary tumor tissue biopsy and metastatic tumor tissue biopsy in the determination ofhormone receptor status (ER/PR) of breast cancer patients. The investigators also found that this high correlation was strongest when comparing metastatictissue biopsy to CTCs (83%). The conclusion of the study was that determining ER/PR status in CTCs using our platform is feasible, with high concordancein ER/PR between tumor tissue (as determined with immunohistochemistry, or IHC) and CTCs (as determined with immunocytochemistry, or ICC). Theauthors suggest a larger trial to determine the prognostic significance of these findings.In September 2015, we presented the clinical validation data of our ctDNA assay in collaboration with the University of California, San Diego. The resultsdemonstrated a very high level of concordance to tissue results (88%), together with >95% analytical sensitivity and 99% analytical specificity, supportingour offering of a validated, robust non-invasive solution for mutation identification and monitoring in patients with lung cancer. Subsequent FDA approvalof Tagrisso®, a third-generation tyrosine kinase inhibitor, presented an opportunity for patients to be monitored using a ctDNA assay.During 2016, we announced a pharmaceutical collaboration agreement that provides testing for a clinical trial, which includes metastatic lung cancerpatients with leptomeningeal or brain metastases. In this exploratory trial, we tested both cerebrospinal fluid and blood for molecular alterations that could beimpacted by treatment. A second pharmaceutical collaboration was announced in 2016, which entails a milestone-based assay development project focusedon hepatocellular carcinoma (HCC), or liver cancer. Custom assays utilizing both our CTC and ctDNA technologies were developed for identifying specifiedbiomarkers and capturing HCC CTCs for potential clinical trial use.In April 2016, we announced a study collaboration with Dr. Giuseppe Giaccone at the MedStar Georgetown University Hospital to assess resistancebiomarkers in non-small cell lung cancer (NSCLC) patients treated with EGFR inhibitors or chemotherapy. Later in 2016, we announced anothercollaboration involving a study presented at the European Society for Medical Oncology, or ESMO, Annual Congress in October 2016, evaluating thedetection of EGFR alterations (del19, L858R and T790M) by our Target-Selector liquid biopsy. Subsequent to this study, we have earned business in bothMexico and Columbia for EGFR testing in blood to qualify patients for a pharmaceutical company’s targeted therapy. The relationship also resulted in astudy initiated during the following year that includes peripheral blood CTC assessment of PD-L1 protein expression in patients undergoing chemotherapyas a monotherapy or in combination with a checkpoint inhibitor. In December 2016, we announced a clinical study agreement with Columbia UniversityMedical Center to evaluate the clinical utility of our Target-Selector platform to diagnose leptomeningeal metastases, or LM, in breast cancer patients. Thiswork was expanded in the fourth quarter of 2018 to include patients with other primary solid tumor types. Dr. Kevin Kalinsky leads this study to test CTCs incerebrospinal fluid and blood, where CTC analysis will be compared to standard methods for confirming LM diagnosis.In May 2017, we entered into a clinical study agreement with the University of Texas Southwestern Medical Center. Led by recognized oncologist and ALKalteration researcher, Dr. Saad Khan, the study is designed to evaluate the clinical utility of our Target-Selector platform for patients diagnosed with ALK-positive NSCLC and treated with ALK-inhibitor therapy. A second arm of the study will evaluate patients with rare cancers such as anaplastic thyroid cancerto determine if genetic drivers such as ALK rearrangements can be identified and treated with targeted therapy to improve patient outcomes.In November 2017, we announced a collaboration involving 100 patients in a clinical study with the University of California, San Diego. The study entailsclinical validation of specified PD-L1 antibody clones on our Target-Selector CTC platform. Concordance of PD-L1 protein expression in tissue biopsyversus liquid biopsy, as well as correlation of therapeutic response with PD-L1 liquid biopsy status, are the study objectives. We submitted a scientific abstract in November 2017 in collaboration with Dr. Shilpa Gupta from the Masonic Cancer Center at the University of Minnesota.The abstract was accepted as a poster presentation for the April 2018 American Association for Cancer Research annual meeting. The results demonstrateproof-of-concept use of our Target-Selector CTC platform to correlate CTC count with clinical responses in refractory testicular cancer patients undergoingtherapy. This work is part of a Phase 2 clinical trial of brentuximab vedontin (an anti-CD-30 antibody) with bevacizumab in refractory CD-30 + germ celltumors. The capability for our Target-Selector CTC platform to monitor this rare cancer type presents the potential for a precision medicine-based approach toguide treatment decisions for these patients.13Two complementary posters on the highly sensitive Target Selector ctDNA assays were presented in 2018. The first poster entitled “Biocept Study ShowsIncorporation of Thermo Fisher QuantStudio 5 PCR Instrument into Target Selector Platform Improves Sensitivity and Specificity in Detection of LungCancer Biomarkers” was presented in January 2018 at the Fifth AACR-IASLC International Joint Conference: Lung Cancer Translational Science from theBench to the Clinic. The related poster, entitled “Validation of highly sensitive TargetSelector™ ctDNA assays for EGFR, BRAF, and KRAS mutations” waspresented at the April 2018 American Association for Cancer Research annual meeting. Together, these posters highlight improvements to the Target SelectorctDNA platform, enabling more sensitive mutation detection down to a single copy, thereby increasing the likelihood of identifying actionable moleculardrivers towards guiding targeted therapy decisions and better management of a patient’s cancer. During the first half of 2018, three key case studies were published in peer-reviewed journals. In April, the 2018 spring issue of Oncology & HematologyReview featured a case report demonstrating the clinical utility of our CTC platform whereby identification of an ALK rearrangement enabled sequentialtargeted therapy and improved quality of life in a patient with NSCLC. This case illustrated the use of our technology to monitor therapeutic response andearly detection of drug resistance to manage patient disease through the course of treatment with various ALK inhibitors. A Letter to the Editor in the May2018 issue of Journal of Thoracic Oncology described the identification of a ROS1 rearrangement by Biocept CTC analysis using FISH (fluorescent in situhybridization). The ROS1 translocation was concordant with tissue biopsy. In contrast, next-generation sequencing analysis of plasma by another vendorfailed to detect the genetic alteration in the patient with lung cancer. Also, in May 2018, a case report describing the application of our CTC technology inthe management of metastatic breast cancer was published in Clinics in Oncology. This work described a patient with recurrent breast cancer where numeroustissue-based evaluations of the individual’s bone-only metastases had repeated challenges or inclusive results. HER2 amplification detected in CTCs fromblood provided crucial information towards changing treatment strategies to include anti-HER therapy, consequently extending and improving the patient’squality of life. Each of the three published cases provide real-life examples in lung and breast cancer towards establishing the importance of liquid biopsy toidentify and monitor clinically actionable biomarkers to improve outcomes of patients with cancer. In July 2018, we announced a collaboration involving two studies with the University of California, San Diego. Each of the two studies will enroll 100patients with solid tumors, for a total of 200 patients. One study will assess the feasibility of using our CTC and ctDNA methodologies to predict post-resection disease recurrence in patients with Stage II or III cancer, and the other study will use our technology to predict response to therapy in patients withmetastatic disease. Dr. Rebecca Shatsky and Dr. Razelle Kurzrock are the investigators key to both studies. In August 2018, we announced a Quality Improvement Initiative with Highmark Health to help improve molecular testing rates of NCCN Category IGuidelines for NSCLC. The Initiative aims to improve health outcomes by using liquid biopsy to more rapidly assess a patient's actionable biomarker statustowards selecting appropriate therapy, while reducing the overall cost of care. The project will evaluate at least 100 patients in the Highmark Health-affiliatedAllegheny Health Network (AHN) Cancer Institute. Patients will receive our CTC and ctDNA testing in addition to tissue biopsy with the goal of obtainingbiomarker status results for a higher percentage of patients compared to standard testing.Two scientific posters featuring the Target Selector™ CTC and ctDNA platforms were presented in September 2018 at the International Association for theStudy of Lung Cancer (IASLC) 19 th World Conference on Lung Cancer. Data from these clinical studies demonstrate the ability of our technology to detectand monitor CTC counts and actionable biomarkers in both blood and cerebrospinal fluid (CSF) of patients with advanced NSCLC. The first poster describedinterim results of a collaboration with Dr. Janakiraman Subramanian at the Saint Luke’s Cancer Institute in Kansas City, Missouri. This study evaluates CTCenumeration in advanced stage NSCLC patients before and during the course of chemotherapy. Interim data suggest that CTC counts may have prognosticand predictive potential to assess therapeutic benefit. The second poster was in collaboration with Kadmon Corporation, featuring CTC and ctDNA analysesand monitoring in the CSF of NSCLC patients with leptomeningeal metastases who were treated with tesevatib in Kadmon’s clinical trial KD019-206. In thisstudy, alterations detected in the CSF of patients were concordant with original tissue biopsies, and serial monitoring of CTCs and ctDNA biomarkers in CSFwere consistent with the overall clinical.A case series manuscript was submitted in December 2018 for consideration as a peer-reviewed journal article in Clinics in Oncology. The paper has beenaccepted for publication and is expected to be released in the first half of 2019. The work highlights the clinical utility of liquid biopsy to stratify patientswho may benefit from targeted therapy, describing three patients with metastatic NSCLC for whom tissue biopsy was insufficient for molecular profiling. Inall three cases, our14ctDNA liquid biopsy analyses detected an activating EGFR mutation. EGFR tyrosine kinase inhibitor therapy subsequently was initiated. Complete responselasting approximately two years was observed in one patient. For two patients, our ctDNA testing was performed at signs of clinical progression andOsimertinib was administered upon our liquid biopsy identification of the EGFR T790M resistance marker. In sum, patient survival was dramaticallyextended in all cases presented where targeted therapies were prescribed based on liquid biopsy results.Provider AgreementsIn January 2017, we announced that we had secured an in-network provider agreement with Blue Cross Blue Shield of Texas, the largest provider of healthbenefits in Texas. In addition, we entered into a national master business agreement with the Blue Cross Blue Shield Association, a not-for-profit tradeassociation that provides multiple services for its 38-member Blue Cross and Blue Shield health plan companies across the U.S., including forming nationalstrategic vendor partnerships. We were selected by the Blue Cross Blue Shield Association based on a rigorous request-for-proposal progress. This agreementestablishes pricing for our Target-Selector liquid biopsy testing service through the Blue Cross Blue Shield Association’s group purchasing organization,CareSourcing Workgroup. The pricing offered by the CareSourcing Workgroup group purchasing organization is available to those Blue Cross and BlueShield member health plans that have, or may seek, in-network agreements with us.In June 2017, we entered into a participating provider agreement with MediNcrease Health Plans, LLC and a preferred provider agreement with ScrippsHealth Plan Services, Inc., both establishing pricing for our Target-Selector liquid biopsy testing service.In December 2017, we signed an agreement with Wellmark, Inc., the largest health insurer in Iowa and South Dakota. The agreement marks our third BlueCross Blue Shield contract and enables patients diagnosed with cancer the ability to access our proprietary testing services in-network under their Wellmarkhealth plan. In August 2018, we entered into a quality initiative program with Highmark and Alleghany Health Network as a result of the Caresourcing Workgroup. Thefocus is to improve access to molecular testing to members with a diagnosis of lung cancer. Enrollment begin in August 2018 and has been steadilyincreasing. We have been working on validation for the Oncomine NGS lung cancer panel in collaboration with Thermo Fisher Scientific. This panel will require an LCDfor reimbursement and we started that process with a meeting with MOLDx in November 2018. We expect to have validation and a complete dossiersubmitted by the second quarter of 2019.We are currently contracted with nine preferred provider organization networks, three large health plans, and five regional independent physicianassociations, and expect to continue to gain contracts in order to be considered as an “in-network” provider with additional plans.Laboratory TestingFrom our CLIA-certified laboratory in San Diego, California, we provide test results from our current and planned CTC and ctDNA assays to medicaloncologists, surgical oncologists, urologists, pulmonologists, pathologists and other physicians in community hospitals, cancer centers, group practices andoffices. At the federal level, clinical laboratories, such as ours, must be certified under CLIA in order for us to perform testing on human specimens. Ourlaboratory is also accredited by CAP, which is one of six accreditation organizations approved by the Centers for Medicare & Medicaid Services, or CMS,under CLIA. Our clinical laboratory is located in California and we hold the requisite license from the California Department of Public Health to operate ourlaboratory. In addition, we hold licenses issued by the states of Maryland, Pennsylvania and Rhode Island to test specimens from patients in those states orreceived from ordering physicians from those states. In addition, our clinical reference laboratory is required to be licensed on a product-specific basis byNew York as an out of state laboratory and our products, as LDTs, must be approved by the New York State Department of Health before they are offered inNew York. As part of this process, the State of New York requires validation of our assays. We are currently in the process of addressing the requirements forlicensure in New York, and we have obtained all required licenses and approvals in all other states requiring licensure of out-of-state laboratories.15Clinical Study Biomarker Testing ServicesIndustry research has revealed that many promising drugs have produced disappointing results in clinical trials. For example, a study by Princess MargaretHospital in Toronto estimated that over a five-year study period 85% of the new therapies for solid tumors which were tested in early clinical trials in theUnited States, Europe and Japan failed, and that of those that survive through to Phase III trials, only a third will actually be approved. Given such a highfailure rate of oncology drugs in clinical development, combined with constrained budgets for pharmaceutical and biopharmaceutical companies, there is asignificant need for drug developers to utilize molecular diagnostics to help decrease these failure rates. For specific molecular-targeted therapeutics, theidentification of appropriate biomarkers may help to optimize clinical trial patient selection and success rates by helping clinicians identify patients that aremost likely to benefit from a therapy based on their individual genetic profile. In addition to testing for physicians and their patients, we offer liquid biopsy testing services to help increase the efficiency and economic viability ofbiomarker analysis pertinent to clinical trials conducted by pharmaceutical and biopharmaceutical companies and clinical research organizations. Our liquidbiopsy testing services are aimed at developing customizable assays and techniques utilizing CTC and ctDNA technologies to provide sensitive, real-timecharacterization of an individual patient’s tumors using a standard blood sample. These assays may be useful as, and ultimately developed into, companiondiagnostics associated with a specific therapeutic. Additionally, through our services, we may gain further insights into biomarkers for disease progressionand drug resistance, as well as those associated with current drug development efforts, which we can incorporate into assays.Assay Development ProcessOur Target-Selector assays were, and our planned additional CTC and ctDNA assays are being, developed and validated in conjunction with leadingacademic and clinical research centers to ensure that the needs of the clinical community are being met with the latest research on key biomarkers that affectpatient care. We utilize a research and validation process to help ensure that we are providing diagnostic, prognostic and predictive information that isclinically relevant and accurate. The time-frame for this process from design through development and market launch is dependent upon, among other things,the biomarkers in question having been discovered and validated before we incorporate them in an assay, the specific clinical claims we plan to pursue, andthe availability of high-quality samples for validation. Our development protocol calls for us to monitor and review the process in four stages as detailedbelow:•Stage 1, Research. We review known, validated biomarkers, preferably associated with a specific therapeutic or other high value treatment decisionand discuss with clinical collaborators and key thought leaders to characterize the opportunity, the specific clinical setting and the product profile ofthe candidate assay.•Stage 2, Assay Development. We design the assay, which typically has two parts: efficient capture of CTCs and/or ctDNA from the targeted cancertype and development of the biomarker assays that will be included. For example, the first part may involve modification of the antibody capturecocktail and the second could include development of specific Target-Selector mutation assays or testing of FISH probes. The assay will be used onnormal control specimens and clinical samples to assure performance and the process includes defining the performance characteristics of the assay aswell as developing standard protocols for our CLIA-certified, CAP accredited, and state-licensed laboratory, where the assay will ultimately beperformed. This assessment includes such features as reproducibility, accuracy, sensitivity, and specificity.•Stage 3, Clinical Validation. When the assay is performing as desired it is validated on clinical samples, typically in comparison to the existing goldstandard for that biomarker, which is usually tumor tissue analysis. Depending on the tumor type and specimen requirement, samples are collectedfrom patients through collaborators, or in the case of ctDNA assays, from sample banks, where clinical information on the patients, includingoutcomes, is already available.•Stage 4, Availability for Commercialization. Upon the completion of clinical validation and before launch, we take several steps to prepare an assayfor marketing as an LDT. We create standard operating procedures and quality assurance and quality control measures to ensure repeatability andhigh standards of quality. We train both our commercial and laboratory staff on the interpretation and use of the data. Licenses and approvals for ourlaboratory to perform or use LDTs have been obtained from the appropriate regulatory authorities, such as CMS, which oversees CLIA, and differentstate regulatory bodies.16We currently offer 18 assays that are available for clinical use that have completed all four stages of the development protocol. Other assays for both CTCsand ctDNA are in earlier stages of development. Markers for such assays include, but are not limited to, ESR1 and a multiplexed assay.We may be required to seek FDA clearance or approval to expand the commercial use of assays to other laboratories and testing sites in the United States. Wemay also need to complete additional activities to submit each of these assays for regulatory clearance or approval before commercialization in each of theinternational markets where introduction is planned.If the FDA finalizes its current draft guidance on a risk-based framework for regulation of LDTs, our process would also need to allow for obtaining FDAreview, clearance or approval, as applicable, which would add delay, expense and risk to our current assay development process. In November 2016, the FDAput the process to review and issue this guidance on hold and has not yet provided further information as to when the process will move forward.Technology DevelopmentIn addition to developing new CTC and ctDNA assays for different cancers to be offered through our CLIA laboratory and adapting additional predictivebiomarkers to these assays as their importance is demonstrated by the scientific and clinical research communities, we continue to focus on improving thebase technologies underlying our assays and processes. We are exploring various ways to improve CTC capture efficiency and detection, as well asapproaches to sub-categorize CTCs into different populations that may have clinical relevance. For example, by determining which antigens individualCTCs expressed that enabled their capture, we could differentiate, and enumerate, various CTC phenotypes, for example, epithelial versus mesenchymal. Weare also working to simplify the assay process, and in general to provide a broader range of useful data on a patient’s cancer to assist the physician indetermining an appropriate treatment. Some of these projects and initiatives include:•Improve Ability to Capture CTCsContinued modification and optimization of our microfluidic channel as a way to further enhance CTC capture efficiency. Capture efficiency directlyimpacts sensitivity, informative rate, and the ability to perform accurate and reliable biomarker analyses on the CTCs, all of which increase the valueof our offering. We are utilizing some of our early research experience to improve CTC capture rates and reduce background contamination fromnormal white blood cells.•Automation of Our Assay ProcessDevelopment of automation throughout the assay process, but particularly at the visual evaluation steps, which include enumeration, any ICC forbiomarkers beyond those used to identify CTCs, for example protein biomarkers, and FISH analysis, is a way to drive efficiencies, reduce costs, speedup turnaround time, and generate more reliable, uniform, and in some cases more sensitive data. We have implemented an automation solution for thevisual analysis, which has been validated and implemented in our CLIA laboratory. We have also adapted a semi-automated system for the separation,processing and washing steps before running a sample on the microfluidic channel, which has also been validated and implemented in the CLIAlaboratory. We are currently implementing further steps in automation, including pipetting. We believe these measures will reduce costs and time aswell as allow for higher-throughput as sample volumes increase.•Development of Second Generation Platform for CTC TestingWe are continuing to evaluate and develop techniques for CTC capture that take advantage of our antibody enrichment cocktail and our stainingtechnology to modify our current CTC process into a simpler IVD testing kit format. In addition to reducing internal costs, such an advance wouldenable us to offer a testing kit format that can access the worldwide CTC testing market. We believe that the distribution of such kits could create anew business opportunity for us.17•Utilization of ctDNA Technology for Highly Multiplexed Mutation TestingThe ctDNA technology should enable us to multiplex mutation testing such that larger panels of genes can be analyzed in a single step and interfacedwith genetic sequencing. This should position us for the analysis at the molecular level of whole signaling pathways or enzyme cascades. We plan totake advantage of the sensitivity and specificity of the ctDNA technology and leverage interest in the clinical research community for detecting anyactionable biomarker in a particular tumor, as opposed to only those that are known to occur at relatively higher frequencies in that type of tumor.Such multiplexed mutation assays, relying on our ctDNA technology, could provide a more global evaluation of a tumor through analysis of eitherCTCs or ctDNA. This would offer a broader range of potential treatment options as well as enable the monitoring of the effectiveness of thosetreatments over time.•Development of Single Cell CTC Isolation Techniques for Molecular AnalysisTumor heterogeneity is a well-recognized problem for tissue analysis and is in part addressed by focusing on CTCs, which may provide a moreuniversal sampling of a tumor. One result of this can be a diverse population of CTCs in a sample, with different phenotypes and genotypesrepresented. We are working with a collaborator on techniques for subsequent sorting of our highly enriched CTC samples released from ourmicrofluidic channels into pools of CTCs with similar phenotypes, and ultimately to single CTCs, for molecular analysis.Translational/Clinical ResearchIn the course of our research and validation studies, we have processed and analyzed thousands of normal control and cancer patient samples. Our initialfocus has been on breast cancer, where validation studies for our CTC assay, including enumeration of CTCs on the Biocept platform compared to theCellSearch® system, and HER2 FISH performed on CTCs and compared with HER2 analysis performed on tumor tissue from the same patients, involved over120 patient samples. The results of our validation studies, and the demonstration of a reliable and reproducible method for CTC capture and analysis usingour platform were published in a paper entitled “Novel Platform for the Detection of Cytokeratin Positive (CK+) and Cytokeratin Negative (CK-) CTCs”appearing in the December 2011 issue of Cancer Discovery and a paper entitled “Efficient capture of circulating tumor cells with a novelimmunocytochemical microfluidic device” appearing in the September 2011 issue of BioMicrofluidics.Additional studies were conducted in breast and other tumor types, including lung, prostate and colorectal cancers, utilizing patient samples for comparisonto the CellSearch® system. In head-to-head studies, our system detected cytokeratin positive CTCs in comparable numbers of breast cancer patients, and inconsiderably more patients in the other cancer types (Cancer Discovery, December 2011). Moreover, the results clearly demonstrated that the use of ourantibody enrichment cocktail enabled recovery of more CTCs compared to using only anti-EpCAM antibodies. These data served as a clinical validationstudy for CTC enumeration. When our staining is applied to detect cytokeratin-negative CTCs, we expect to see far more CTCs based on preliminary studiesreported in a paper entitled “Detection of EpCAM-Negative and Cytokeratin-Negative CTCs in Peripheral Blood” appearing in the 2011 issue of the Journalof Oncology.Our system has the added advantage of post-capture immunofluorescent, cytogenetic and molecular genomic analyses of the CTCs. Cells captured byBiocept’s proprietary Target-Selector system can be analyzed directly within the microfluidic channel, removing the need to re-deposit cells on a slide andthereby minimizing cell loss or damage. Furthermore, given the transparency of the microfluidic channel, captured cells can be immediately analyzed on amicroscope. Together, these two important features allow for a very efficient process that is well suited for a laboratory developed test (LDT) performed in aCLIA laboratory. The post-capture analyses directed towards evaluation of biomarkers, are particularly important and valuable to physicians and patientssince they focus on actionable information related to therapy selection. We have performed a number of clinical research studies in collaboration with TheUniversity of Texas MD Anderson Cancer Center investigators involving various tumor types, including breast, ovarian, endometrial, lung, colorectal,bladder and prostate cancers.In a collaboration with physicians and researchers at The University of Texas MD Anderson Cancer Center, we evaluated matched samples of tumor tissue,blood for CTCs, and bone marrow for DTCs in recently diagnosed breast cancer patients to identify HER2 amplification. Positive HER2 status would indicateeligibility for HER2-targeted therapies like Herceptin®, a potentially life-saving treatment. These results were presented at both the 2011 and 2012 annualmeetings of the American Society of Clinical Oncology. In a 95 patient study published in Cancer Medicine (2013, 2(2) 226-233), HER2 positive CTCs18and/or DTCs were identified in 18.9% of cases in which the primary tumor was HER2 negative. In the same cohort of patients, only 12.6% were HER2positive in their primary tumor. In other words, beyond the 12 (of 95) patients for whom traditional tumor tissue analysis had indicated benefit fromHerceptin-based therapy, the Target-Selector assay detected HER2 gene amplification in 18 (of 95) patients who (despite the fact they were identified asbeing HER2 negative by primary-tumor testing) could benefit from Herceptin-based therapy. Patients classified as HER2 negative based on tumor tissue andfound to have HER2 positive CTCs and/or DTCs were subsequently monitored by our collaborators at The University of Texas MD Anderson Cancer Centerto assess their overall and progression-free survival. Tumor heterogeneity is one likely cause of the discordance for HER2 status between tumor tissue and ourassay performed on blood and bone marrow samples. Tumor heterogeneity indicates an important clinical application for the CTC analysis with the Target-Selector assay. Our technology can use a standard blood sample to confirm and crosscheck tissue analysis performed by the pathologist at the time of biopsyor surgery, especially if HER2 negative.Our Target-Selector platform is well suited towards blood-based analysis of breast cancer biomarkers. A 24-patient study published with Columbia University(Clinical and Translational Oncology, 2015, 17(7):539-46) demonstrated the feasibility of CTC testing to evaluate ER and PR status in metastatic breastcancer (mBC) patients. Results showed a concordance of 83% and 68% in ER/PR status between CTCs vs. metastatic tissue tumor, and CTCs vs. primarytissue, respectively. More recently, a December 2016 San Antonio Breast Cancer Symposium poster presentation featured the evaluation of 74 mBC patients.This collaborative work with the Sarah Cannon Research Institute, demonstrated detection of CTCs in 99% of mBC patient samples. In addition, ER proteinexpression concordance was 84% in cytokeratin positive cells and 18% in cytokeratin negative cells. FISH-based analysis of captured CTCs displayed tissueconcordances of 93% and 68% for HER2 gene amplification in cytokeratin positive CTCs and cytokeratin negative CTCs, respectively; FGFR1amplification concordances to tissue were 79% and 67% for cytokeratin positive CTCs and cytokeratin negative CTCs, respectively. While furtherinvestigation is needed to elucidate the significance of cytokeratin negative cells as a possible prognostic indicator to evaluate ER, HER2 and FGFR1biomarkers in mBC patients, our ability to assess cytokeratin positive and negative CTCs affords a distinct advantage over other CTC technologies that relysolely upon characterization of cytokeratin positive CTCs.We have also developed proprietary and robust technology to detect and quantify mutant ctDNA in plasma originating from the same blood sample that isused for the previously described CTC analyses. In collaboration between Mexico’s Instituto Nacional de Cancerologia and AstraZeneca, a clinicalevaluation of blood-based liquid biopsy mutational profiling using our service was performed on 60 advanced-stage non-small cell lung cancer patients.Target-Selector assays are highly sensitive with the ability to detect EGFR mutations down to one mutant copy per milliliter of plasma. The highconcordance of ctDNA versus tissue exhibited in this work highlights Target-Selector plasma ctDNA assays as a viable and practical means to detect EGFRactivating and acquired resistance mutations relevant for guiding targeted therapy decisions.Clinical utility studies, which demonstrate the specific clinical setting in which a particular CTC or ctDNA assay is used, and how to use the informationgenerated for medical, specifically treatment-related, decision making is a key part of our strategy and research and development plan. Data resulting fromsuch studies is critical not only in the sales and marketing process, but also for reimbursement, as many health plans and government payers now ask for peer-reviewed publications describing such studies and results before agreeing to coverage of a specific assay. We are involved in and plan to become involved innumerous studies to further demonstrate the clinical utility of our assays.Sales and MarketingAt December 31, 2018, our sales organization consisted of 10 sales representatives placed in strategic locations around the country that have highconcentrations of cancer patients, and we may, depending on assay volume, potentially grow this number to 20-25 sales representatives within two years andto 30-35 within five years. We have defined sales territories and have hired sales professionals with extensive successful experience in clinical oncology salesor oncology diagnostic testing sales from leading biopharmaceutical, pharmaceutical or specialty reference laboratory companies. We plan on growing thisspecialized, oncology-focused sales force and supporting it with clinical specialists who bring significant technical knowledge in the use of CTC and ctDNAassays.Finally, we have invested in a managed care sales and marketing expert in order to pursue favorable payment and coverage for our liquid biopsy testingservices. The key value proposition for these customers will be focused on clinical utility and cost savings by offering our assays as alternatives to expensivesurgeries when tumor biopsy tissue is insufficient or not available.19Our sales and marketing efforts are and will be based on a five-part marketing strategy:•Work with oncologists, other physicians and group practices at community hospitals and cancer centers to educate them on the advantages andopportunities that CTC and ctDNA assays provide for better information, allowing them to select the most appropriate therapy for their patients, andhow and when these assays are most effectively used;•build relationships with key thought leaders in oncology, specifically in the cancer types for which we are offering or plan to offer assays, to educateand support community oncologists;•collaborate with leading research universities and institutions that enable the validation of our new assays, as well as the generation of clinical utilitydata;•partner with pharmaceutical companies for clinical trial work focusing on CTC and ctDNA testing and analysis; and•add value for the payer community by delivering clinically actionable information and providing a cost-effective alternative to access clinicallyactionable information through the use of a simple blood test.We also take advantage of customary marketing channels commonly used by the diagnostic and pharmaceutical industries, such as medical meetings, broad-based publication of our scientific and clinical data, and the Internet. In addition, we provide easy-to-access information to our customers through ourwebsite and a data portal for physicians who wish to access test results electronically. Our customers value secure and easily accessible information in orderto quickly review their patients’ information and begin developing a treatment protocol.Outside the United StatesOutside the United States, where a central laboratory business model is less developed, we will evaluate opportunities with our existing and other partners forthe conversion and/or development of our current and planned CTC and ctDNA assays into test systems or IVDs, and related strategies to develop and servesuch regional oncology markets. We also plan to sell our clinical trial services to biopharmaceutical companies and research organizations outside the UnitedStates.We plan to cooperate with partners on accessing markets internationally. We plan for this to be accomplished either through partnerships with local groupsand distributors or the development of IVD test kits and/or test systems, including instrumentation. CompetitionAs a cancer diagnostics company focused on current and planned assays for CTCs and ctDNA from standard blood samples, we rely extensively on our abilityto combine novel technology and biomarker information with high-quality, state-of-the art clinical laboratory testing. We believe that we competeprincipally on the basis of:•Our ability to utilize standard blood samples, enabling frequent testing of patients through the course of their disease in addition to, or without abiopsy, thereby reducing cost and trauma, saving time, and providing real-time information on the current status of the tumor;•our ability to include biomarker information in our analysis, in addition to CTC enumeration, thereby providing a more complete profile of apatient’s disease than existing CTC tests. This clinically actionable information can assist physicians in selecting more personalized treatment plansfor individual patients;•our current and planned future CTC assays’ ability to capture and detect a broader range of CTC phenotypes than existing tests, and potentially atearlier stages of disease, resulting in fewer non-informative cases and more information for physicians. For example, our antibody capture cocktailtargets not only EpCAM but also other epithelial antigens as well as mesenchymal and cancer stem cell antigens, indicative of cells havingundergone the epithelial-to-mesenchymal transition. These cells may be more relevant for metastasis;•our ability to rapidly integrate new biomarkers, either validated in academic laboratories or of interest to pharmaceutical and biopharmaceuticalcompanies in the context of their new therapies, into our current and planned future assays, facilitating the expansion of actionable information formedical oncologists, surgical oncologists, urologists, pulmonologists, pathologists and other physicians;20•our research and clinical collaborations with key academic and clinical study groups, which enhance our research and development resources and, byenhancing our standing in the oncology community, support our marketing efforts; and•our current and planned ctDNA assays based on our patented technology, which currently offer and are expected to continue to offer enhancedsensitivity and specificity in detecting mutation targets or resistance markers, again supporting treatment decisions.We believe that we compete favorably with respect to these factors, although we cannot assure you that we will be able to continue to do so in the future orthat new products or assays that perform better than our current and planned future assays and services will not be introduced. We believe that our continuedsuccess depends on our ability to:•Expand and enhance our current and planned Target-Selector assays to provide clinically meaningful information in additional cancers;•work with clinicians to design and implement clinical studies that demonstrate the clinical utility of our products;•continue to innovate and maintain scientifically advanced technology including development and regulatory approvals;•successfully market and sell assays;•continue to comply with regulatory guidelines and obtain appropriate regulatory approvals in the United States and abroad as applicable;•continue to validate our pipeline of assays;•conduct or collaborate with clinical utility studies to demonstrate the application and medical value of our assays;•continue to seek to obtain positive coverage and reimbursement decisions from Medicare and private third-party payers;•continue to enter into sales and marketing partnerships;•maintain existing and enter into new research and clinical collaborations with key academic and clinical study groups;•continue to attract and retain skilled scientific, clinical, laboratory, and marketing personnel;•continue to participate in and gain clinical trial work through biopharma partnerships;•receive payment for the testing we provide for patients;•obtain patents or other protection for our technologies, assays and services; and•obtain and maintain our clinical reference laboratory accreditations and licenses. Our principal competition comes from mainstream diagnostic methods, used by medical oncologists, surgical oncologists, urologists, pulmonologists,pathologists and other physicians for many years, which focus on tumor tissue analysis. The methods or behavior of medical oncologists, surgicaloncologists, urologists, pulmonologists, pathologists and other physicians may be difficult to change regarding the use of our CTC and ctDNA testing,including molecular diagnostic testing, in their practices in conjunction with or instead of tissue biopsies and analysis. In addition, companies offeringcapital equipment and kits or reagents to local pathology laboratories represent another source of potential competition. These kits are used directly by thepathologist, which can facilitate adoption. Historically, we have focused our marketing and sales efforts on medical oncologists rather than pathologists,although commencing in October 2017, our Empower TC offering provides the unique ability for pathologists to participate in the interpretation of liquidbiopsy results and is available to pathology practices and hospital systems throughout the United States.We also face competition from companies that offer products or are conducting research to develop products for CTC or ctDNA testing in various cancers.CTC and ctDNA testing is a new area of science and we cannot predict what assays others will develop that may compete with or provide results similar orsuperior to the results we are able to achieve with the assays we develop. Competitors include but are not limited to companies such as Atossa, Agena,Qiagen, Roche, Guardant Health, Menarini Silicon Biosystems, Alere (Adnagen), Illumina, Apocell, EPIC Sciences, Clearbridge Biomedics, Biodesix,Thermo Fisher Scientific, Foundation Medicine, Neogenomics, Cynvenio Biosystems, Genomic Health, Fluxion Biosciences, RareCells, ScreenCell, andSysmex. Some of these groups, in addition to operating research and development laboratories, are establishing CLIA-certified testing laboratories whileothers are focused on selling equipment and reagents.21There are a number of companies which are focused on the oncology diagnostic market, such as Cancer Genetics, Caris, Neogenomics and Agendia, whowhile not currently offering CTC or ctDNA assays are selling to the medical oncologists and pathologists and could develop or offer CTC or ctDNA assays.Large laboratory services companies such as Quest and LabCorp provide more generalized cancer diagnostic testing but could also offer a CTC or ctDNAtesting services. Companies like Abbott, Danaher, Qiagen, Thermo Fisher Scientific and others could develop equipment or reagents in the future as well.Some of our present and potential competitors have widespread brand recognition and substantially greater financial and technical resources anddevelopment, production and marketing capabilities than we do. Others may develop lower-priced, less complex assays that payers, medical oncologists,surgical oncologists, urologists, pulmonologists, pathologists and other physicians could view as functionally equivalent to our current or planned futureassays, which could force us to lower the list price of our assays and impact our operating margins and our ability to achieve and maintain profitability. Inaddition, technological innovations that result in the creation of enhanced diagnostic tools that are more sensitive or specific than ours may enable otherclinical laboratories, hospitals, physicians or medical providers to provide specialized diagnostic assays similar to ours in a more patient-friendly, efficient orcost-effective manner than is currently possible. If we cannot compete successfully against current or future competitors, we may be unable to increase orcreate market acceptance and sales of our current or planned future assays, which could prevent us from increasing or sustaining our revenues or achieving orsustaining profitability.Additionally, projects related to cancer diagnostics and particularly genomics have received increased government funding, both in the United States andinternationally. As more information regarding cancer genomics becomes available to the public, we anticipate that more products aimed at identifyingtargeted treatment options will be developed and that these products may compete with ours. In addition, competitors may develop their own versions of ourcurrent or planned future assays in countries where we did not apply for patents or where our patents have not issued and compete with us in those countries,including encouraging the use of their assay by physicians or patients in other countries.Third-Party Suppliers and ManufacturersSome of the components used in our current or planned future products are currently sourced from a supplier for which alternative suppliers exist, but we havenot validated the products of such alternative suppliers, and substitutes for these components might not be able to be obtained easily or may requiresubstantial design or manufacturing modifications. Any significant problem experienced by any one of our suppliers may result in a delay or interruption inthe supply of components to us until that supplier cures the problem or an alternative source of the component is located and qualified. Any delay orinterruption would likely lead to a delay or interruption in our manufacturing operations. The inclusion of substitute components must meet our productspecifications and could require us to qualify the new supplier with the appropriate government regulatory authorities.Patents and TechnologyThe proprietary nature of, and protection for, our products, services, processes, and know-how are important to our business. Our success depends in part onour ability to protect the proprietary nature of our products, services, technology, and know-how, to operate without infringing on the proprietary rights ofothers, and to prevent others from infringing our proprietary rights. We seek patent protection in the United States and internationally for our products,services and other technology. Our policy is to patent or in-license the technology, inventions and improvements that we consider important to thedevelopment of our business.We also rely on trade secrets, know-how, and continuing innovation to develop and maintain our competitive position. We cannot be certain that patents willbe granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure thatany of our existing patents or any patents granted to us in the future will be commercially useful in protecting our technology.Our success depends on an intellectual property portfolio that supports our future revenue streams and erects barriers to our competitors. We are maintainingand building our patent portfolio through filing new patent applications, prosecuting existing applications, and licensing and acquiring new patents andpatent applications.22Despite these measures, any of our intellectual property and proprietary rights could be challenged, invalidated, circumvented, infringed or misappropriated,or such intellectual property and proprietary rights may not be sufficient to permit us to take advantage of current market trends or otherwise to providecompetitive advantages. For more information, see the section entitled “Risk Factors – Intellectual Property Risks Related to Our Business.”We have issued patents with broad claims covering our blood collection tube, antibody cocktail approach, microchannel, CTC detection methodologies, andctDNA analysis. In addition to issued patents in the U.S., we have patents for our proprietary microchannel in China, Korea, Europe, Hong Kong, Canada andJapan, and for our antibody cocktail in Australia, Europe, Hong Kong and Japan. Our patent estate continues to evolve, and in addition to the broad patentestate around our CTC platform, we also have issued patents in the U.S., Australia, Europe and China for our novel switch blocker technology, solidifying ourproprietary enrichment methodology for detecting ctDNA with very high sensitivity. Our CTC platform patents were filed from 2005 through 2012, and weexpect to have patent protection into the 2030s. Our CTC patents and applications cover not only cancer as a target, but also prenatal and other rare cells ofinterest. Recently allowed patents in the U.S. cover the capture of “any target of interest on any solid surface” using our antibody capture approach. Thepatent for our proprietary specimen collection tubes expire in 2031, and the patents for our ctDNA technology expire in the early 2030’s.As of December 31, 2018, we owned 31 issued patents and 18 patents pending related to our current technologies. Of these, 8 were issued and 5 were pendingpatents in the U.S., while 23 were issued and 13 were pending patents in non-U.S. territories. Separately, we also owned 7 issued patents related to our earliermicroarray and cell analysis technology.Microfluidic Channels. At December 31, 2018, we had 3 issued U.S. patents that are related to our current business, and in 2017 and 2018 we received anadditional issued patent on our microfluidic channel in each of China and Hong Kong, respectively, in addition to our earlier allowances in Japan, HongKong, Europe, China, and South Korea, which cover our microfluidic channel technology. Further U.S. and foreign patent application are pending.Blood Collection Tubes. In 2015, we received a U.S. patent related to our blood collection tubes, which contain reagents designed to prevent clumping ofblood cells and CTCs that could clog the microfluidic channels and disrupt our assays.Antibody Enrichment Cocktail. At December 31, 2018, we had 2 issued and 1 pending U.S. patent application, and 2 broadly issued European patents, as wellas other corresponding foreign patent applications directed to our antibody capture cocktail technology. This technology includes using antibodies to anumber of tumor-associated antigens from cancer cells of both epithelial and mesenchymal phenotype, as well as cancer stem cells.Enhanced Staining. At December 31, 2018, we had 1 issued U.S. patent, 1 issued Chinese patent, and 1 issued Japanese patent, as well as correspondingforeign patent applications directed to this technology.Target-Selector Mutation Detection Technology. At December 31, 2018, we co-owned 1 issued and 1 pending U.S. patent, 1 issued Australian patent, 1issued Chinese patent, 1 issued Japanese patent, and 1 issued European (7 countries) patent, as well as with Aegea Biotechnologies, Inc., or Aegea. Under ouragreement with Aegea, we have certain exclusive rights for oncology clinical testing and diagnostics as well as limited rights for oncology basic and clinicalresearch. Aegea is responsible for the prosecution of 1 U.S. patent application, while we are responsible for the prosecution of the second U.S. application andits corresponding foreign applications. Lyle J. Arnold, Ph.D., our Senior Vice-President of Research & Development and Chief Scientific Officer, is thecontrolling person of Aegea.Operations and Production FacilitiesOur research and development laboratory, our CLIA-certified, CAP accredited, and state-licensed diagnostic testing laboratory and our manufacturing facilityare located in our San Diego, California headquarters. The laboratories employ commercial state-of-the-art equipment as well as custom-made componentsspecific to our CTC process that are generated in a small in-house engineering shop. The manufacturing facility used for the production of our microfluidicchannels is a Class 10,000 suite in which polydimethylsiloxane is formed into the base of our proprietary microfluidic channels in a molding process. A glasscover slip suitable for optical analysis is added to seal the channels and make them watertight by making them reactive using plasma techniques. The insideof the microfluidic channels is subsequently chemically derivatized to enable the attachment of binding elements that strongly bind to antibody-tagged orcoated CTCs. Because the microfluidic channels have micrometer dimensions, and we are seeking individual cells in a blood sample to interact with thesurface of the microfluidic channel, dust particles and other microscopic debris that could clog the channel needs to be avoided.23The process of performing our assays is straightforward. When a health care professional takes a standard blood sample from a patient for CTC or ctDNAtesting, he or she will place the blood sample in our blood collection tubes, complete a requisition form, and package the specimen in our shipping kit fordirect shipment to us. Once we receive the specimen at our laboratory and we enter all pertinent information about the specimen into our clinical laboratoryinformation system, our laboratory technologists prepare the specimen for processing and analysis. Laboratory technologists, including clinical laboratorytechnologists and clinical laboratory scientists then conduct the analysis, including enumeration of CTCs and biomarker analysis such as FISH. The data,including images and the processed cells, are sent to our in-house or contracted pathologists or a commercialization partner’s pathologists who areexperienced in the analysis and evaluation requested by the referring oncologist or pathologist.After analysis, our in-house or contracted pathologists or a commercialization partner’s pathologists use laboratory information systems to prepare acomprehensive report, which may include selected relevant images associated with the specimen. Our Internet reporting portal allows a referring oncologistor pathologist to access his or her patient’s test results in real time in a secure manner that we believe to be compliant with the Health Insurance Portabilityand Accountability Act, or HIPAA, and other applicable standards. The reports are generated in industry standard .pdf formats which allows for highdefinition color images to be reproduced clearly. We send the results to the ordering physician and bill the payer using third-party medical billing software.Quality Management ProgramWe have established a Quality Management Program for our research, development and Clinical Laboratory Improvement Amendments (CLIA) certifiedtesting laboratories. This program is designed to help ensure accurate and timely test results, to produce consistent high-quality testing services, as well asprocedures which allow for the continual improvement of established and new operations. Our Quality Management Program foundation is built upon arigorous documentation program which allows transparent quality assurance and performance improvement plans, necessary to ensure the highest quality ofdiagnostic testing services. This program is designed to satisfy the requirements of local and state licensures, as well as those for accreditation by CAP. TheCAP accreditation program involves unannounced on-site inspections of our laboratories. CAP is an independent, non-governmental organization of board-certified pathologists that accredits laboratories nationwide on a voluntary basis and that has been recognized by the Center for Medicare and MedicaidServices (CMS) as an accreditation organization to inspect laboratories to determine adherence to CLIA standards.We are committed to providing reliable and accurate diagnostic testing to our customers. Accurate specimen sample management, timely communication oftest results, and strict adherence to patient privacy policies are a critical core competency of our company. We monitor and improve our performance throughour internal audit program, which investigates any abhorrent results, continually track performance indicators, perform internal proficiency testing and hostexternal quality audits, primarily conducted by CAP.In addition to the compulsory proficiency programs and external inspections required by CMS and other regulatory agencies, we have developed a variety ofinternal systems and procedures to emphasize, monitor and continuously improve the quality of our operations. We maintain internal quality controls byroutinely processing specimens with known diagnoses in parallel with patient specimens. We also have an internally administered proficiency program forspecimen testing.Third-Party Payer ReimbursementRevenues from our clinical laboratory testing are derived from several different sources. Depending on the billing arrangement, instructions of the orderingphysician and applicable law, parties that reimburse us for our services include:•Third-party payers that provide coverage to the patient, such as an insurance company, a managed care organization or a governmental payerprogram;•physicians or other authorized parties, such as hospitals or independent laboratories, that order the testing service or otherwise refer the services to us; •patients in cases where the patient has no insurance, has insurance that partially covers and reimburses the testing, or owes a co-payment, co-insuranceor deductible amount;24•collaboration partners; or•biopharmaceutical companies, universities or researchers for clinical trial work.We are reimbursed for two categories of testing, anatomic pathology, which includes cell staining and the enumeration component of CTC assays, FISH, ICCand immunofluorescence, and molecular pathology, which includes mutation analysis. Reimbursement under the Medicare program for the diagnosticservices that we offer is based on either the Medicare Physician Fee Schedule, or PFS, or the Medicare Clinical Laboratory Fee Schedule, or CLFS, each ofwhich is subject to geographic adjustments and is updated annually. Medical services provided to Medicare beneficiaries that require a degree of physiciansupervision, judgment or other physician involvement, such as pathology services, are generally reimbursed under the PFS, whereas clinical diagnosticlaboratory tests are generally reimbursed under the CLFS. Some of the services that we provide are genetic and molecular testing, which are reimbursed asclinical diagnostic laboratory tests.Regardless of the applicable fee schedule, Medicare payment amounts are established for each Current Procedural Terminology, or CPT, code. In addition,under the Clinical Laboratory Fee Schedule, Medicare also sets a cap on the amount that it will pay for any individual assay. This cap, usually referred to asthe National Limitation Amount, is set at a percentage of the median of all the contractor fee schedule amounts for each billing code.Medicare also has policies that may limit when we can bill directly for our services and when we must instead bill another provider, such as a hospital. Whenthe testing that we perform is done on a specimen that was collected while the patient was in the hospital, as either an inpatient or outpatient, we may berequired to bill the hospital for clinical laboratory services and for the technical component of pathology services. Which party is to be billed dependsprimarily on whether the service was ordered at least 14 days after the patient’s discharge from the hospital. Complying with these requirements is complexand time-consuming and may affect our ability to collect for our services. In addition, hospitals may refuse to pay our invoices or may demand pricing thatnegatively affects our profit margin.Medicare requires a beneficiary to pay a 20% co-insurance amount for services billed under the PFS. Medicare covers the remaining 80%. There is currentlyno patient co-payment or co-insurance amount applicable to testing billed under the CLFS. Patients often have supplemental insurance policies that coverthe co-insurance amount for physician services.Medicare has coverage policies that can be national or regional in scope. Coverage means that assay is approved as a benefit for Medicare beneficiaries. Ifthere is no coverage, neither the supplier nor any other party, such as a reference laboratory, may receive reimbursement from Medicare for the service. Thereis currently no national coverage policy regarding the CTC enumeration portion of our testing. Because our laboratory is in California, the regional MedicareAdministrative Contractor, or MAC, for California is the relevant MAC for all our testing. The previous MAC for California, Palmetto GBA, LLC, orPalmetto, which is contracted with CMS to administer the Molecular Diagnostic Services, or MolDx, program that sets guidelines for coding, coverage andreimbursement of molecular diagnostic assays, adopted a negative coverage policy for CTC enumeration. The current MAC for California, NoridianHealthcare Solutions, LLC, is adopting the coverage policies from Palmetto. Therefore, the enumeration portion of our testing is not currently covered, andwe will receive no payment from Medicare for this portion of the service unless and until the coverage policy is changed. Although approximately 76% and76% of all billable cases received during the years ended December 31, 2017 and 2018, respectively, relate to our Target-Selector biomarker assays, wecontinue to receive orders for our traditional enumeration testing, which counts disease burden, and therefore the enumeration testing receives no paymentfrom Medicare based upon the existing coverage decision. The CTC enumeration counts disease burden and is a prognostic test, and although oncologistsfind the information valuable, it does not currently meet many of the medical necessity requirements of Medicare and the payers. We intend to pursuepayment for the capture portion of our CTC technology that allows us to run our diagnostic testing for some of our Target-Selector assays.Reimbursement rates paid by private third-party payers can vary based on whether we are considered to be an “in-network” provider, a participating provider,a covered provider, an “out-of-network” provider or a non-participating provider. These definitions can vary among payers, but we are generally consideredan “out-of-network” or non-participating provider by the vast majority of private third-party payers. An in-network provider usually has a contract with thepayer or benefits provider. This contract governs, among other things, service-level agreements and reimbursement rates. In certain instances, an insurancecompany may negotiate an in-network rate for our testing. An in-network provider may have rates that are lower per assay than those that are out-of-network,and that rate can vary widely. The rate varies based on the payer, the testing type and often the specifics of the patient’s insurance plan. If a laboratory agreesto contract as an in-network provider, it generally expects to receive quicker payment and access to additional covered patients.25 Billing and Billing Codes for Third-Party Payer ReimbursementCPT codes are the main billing code set used by physicians, hospitals, laboratories and other health care professionals to report separately-payable clinicallaboratory and pathology services for reimbursement purposes. The CPT coding system is maintained and updated on an annual basis by the AmericanMedical Association. We believe there are existing codes that describe nearly all of the steps in our testing process. We currently use a combination of codesto bill for our testing and analysis.In order to ensure our coding is compliant, we have engaged industry experts to provide guidance on the proper coding of our assays. These experts includeconsultants at Senergene Solutions, LLC, Codemap, LLC and ADVI Health, LLC. However, coding can be complex, and payers may require differing codesfor a given assay to effect payment. Changes in coding and reimbursement could adversely impact our revenues going forward, or payers could request thatwe reimburse them for payments we have already received. There can be no guarantees that Medicare and other payers will establish new positive or adequatecoverage policies or reimbursement rates, or not change existing positive coverage policies, in the future.We are moving forward with plans to obtain reimbursement coverage for the capture components of our assays. For other tests, we are able to utilize existingCPT codes from the PFS and CLFS. For these established CPT codes (for example, the codes for molecular testing, FISH and ICC), positive coveragedeterminations have been adopted as part of national Medicare policy or under applicable Local Coverage Determinations. Specific codes for our assays,however, do not assure an adequate coverage policy or reimbursement rate. Please see the section entitled “Legislative and Regulatory Changes ImpactingClinical Laboratory Tests” for further discussion of certain legislative and regulatory changes to these billing codes and the anticipated impact on ourbusiness.Coverage and Reimbursement for our Current Assays and our Planned Future AssaysOur Medicare Administrative Contractor has issued a negative coverage determination for the enumeration component of all CTC assays. We have receivedreimbursement for the enumeration component of our assays from some private payers, including major private third-party payers, based on submission ofstandard CPT codes. FISH, ICC and Molecular Testing CPT codes are the subject of positive coverage national or local Medicare determinations. We believethese codes can be used to bill for the analysis components of our current and planned future CTC assays, however, CMS, Palmetto or Noridian could adoptspecific negative coverage policies for CTCs or ctDNA analysis in the future.We expect these analysis components to have a significantly greater reimbursement value than the enumeration components of our current and anticipatedCTC assays, based on a comparison of what we believe CellSearch® enumeration reimbursement rates currently are, versus existing reimbursement rates foranalysis components such as FISH and ICC analysis and molecular testing.Additionally, on March 16, 2018 CMS issued a final determination decision memo for Next-Generation Sequencing, or NGS, tests for Medicare Beneficiarieswith Advanced Cancer (CAG-00450N). Under this final determination, NGS tests that gain FDA approval or clearance as a companion diagnostic will receivecoverage, and the final determination of coverage for NGS tests that are LDTs will be left up to the local MAC. Currently, only 1 of our 15 CLIA validatedassays is NGS-based; however, we plan to offer additional NGS assays in the future. To gain coverage for those assays, we will need to apply to Palmetto,which is the MAC that evaluates and recommends payment coverage or denial for molecular testing in our jurisdiction. Historically, Palmetto has offered apath to reimbursement by providing coverage while data is being gathered known as Coverage with Data Development, or CDD. Going forward, the extent towhich CDD will be continued, if at all, or to the extent that a process will be available in its place, if any, are unclear. We believe, based on research showing that approximately 54% of new cancers occur in persons age 65 and older and that almost all Americans age 65 andolder are enrolled in Medicare that a substantial portion of the patients for whom we would expect to perform cancer diagnostic assays will have Medicare astheir primary medical insurance. We cannot assure you that, even if our current and our planned future assays are otherwise successful, reimbursement for thecurrently Medicare-covered portions of our current and our planned future assays would, without Medicare reimbursement for the enumeration portion,produce sufficient revenues to enable us to reach profitability and achieve our other commercial objectives.26Where there is a private or governmental third-party payer coverage policy in place, we bill the payer and the patient in accordance with the establishedpolicy. Where there is no coverage policy in place, we pursue reimbursement on a case-by-case basis. Our efforts in obtaining reimbursement based onindividual claims, including pursuing appeals or reconsiderations of claims denials, could take a substantial amount of time, and bills may not be paid formany months, if at all. Furthermore, if a third-party payer denies coverage after final appeal, payment may not be received at all. We are working to decreaserisks of nonpayment by implementing a revenue cycle management system. We cannot predict whether, or under what circumstances, payers will reimburse for all components of our assays. Payment amounts can also vary acrossindividual policies. Full or partial denial of coverage by payers, or reimbursement at inadequate levels, would have a material adverse impact on our businessand on market acceptance of our assays.Legislative and Regulatory Changes Impacting Clinical Laboratory TestsFrom time to time, Congress has revised the Medicare statute and the formulas it establishes for both the CLFS, and the PFS. Annually, CMS releases thepayment amounts under the Medicare fee schedules. The rates are important because they not only determine our reimbursement under Medicare, but thosepayment amounts are also often used as a basis for payment amounts set by other governmental and private third-party payers. For example, state Medicaidprograms are prohibited from paying more than the Medicare fee schedule limit for clinical laboratory services furnished to Medicaid recipients.In accordance with Section 1833 (h)(2)(A)(i) of the Social Security Act, the annual update to the CLFS for calendar year 2019 is 2.30% (see 42CFR405.509(b)(1)). With respect to our diagnostic services for which we expect to be reimbursed under PFS, CMS issues a Final Rule on an annual basis.Since 2015, the PFS Final Rules have included both increases and decreases in certain relative value units and geographic adjustment factors used todetermine reimbursement for a number of codes used in our current assays and our planned future assays. These codes describe services that we must performin connection with our assays and we bill for these codes in connection with the services that we provide.Additionally, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA,enacted in March 2010, makes a number of substantial changes in the way health care is financed by both governmental and private insurers. Among otherthings, the ACA requires certain medical device manufacturer to pay an excise tax equal to 2.3%, or Medical Device Excise Tax, of the price for which suchmanufacturer sells its medical devices that are listed with the FDA. This tax may not apply to certain diagnostic assays; nevertheless, applicability of the taxcould change in the future if either the FDA or the Internal Revenue Service, which regulates the payment of this excise tax, changes its position.Although some of these provisions may negatively impact payment rates for clinical laboratory tests, the ACA also extends coverage to over 30 millionpreviously uninsured people, which may result in an increase in the demand for certain diagnostic assays. Since January 2017, the President of the UnitedStates has signed two executive orders and other directives designed to delay, circumvent, or loosen certain requirements mandated by the ACA.Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passedcomprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing penalties starting January 1, 2019, for notcomplying with the ACA’s individual mandate to carry health insurance and delaying the implementation of certain ACA-mandated fees, including but notlimited the Medical Device Excise Tax. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entiretybecause the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. While the Texas U.S. District Court Judge, as wellas the Trump administration and CMS, have stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how thisdecision, subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA.Moreover, other legislative changes have been proposed and adopted since the ACA was enacted. The Protecting Access to Medicare Act of 2014, or PAMA,was signed to law, which, among other things, significantly alters the current payment methodology under the CLFS. Under the new law, issued in 2016 andthe reporting period beginning in 2017 and every three years thereafter (or annually in the case of advanced diagnostic laboratory tests), clinical laboratoriesmust report laboratory test payment data for each Medicare-covered clinical diagnostic laboratory test that it furnishes during a time period. The reporteddata must include the payment rate (reflecting all discounts, rebates, coupons and other price concessions) and the volume of each test that was paid by eachprivate payer (including health insurance issuers, group health plans, Medicare Advantage plans and Medicaid managed care organizations). Beginning in2018, the Medicare payment rate for each clinical27diagnostic laboratory test is equal to the weighted median amount for the test from the most recent data collection period. The payment rate will apply tolaboratory tests furnished by a hospital laboratory if the test is separately paid under the hospital outpatient prospective payment system. The PAMA ratechanges to our tests that were impacted did not materially affect our payments beginning in 2018; however, we cannot predict how this may change futurepayment in coming years. Also, under PAMA, CMS is required to adopt temporary billing codes to identify new tests and new advanced diagnosticlaboratory tests that have been cleared or approved by the FDA. For an existing test that is cleared or approved by the FDA and for which Medicare paymentis made as of April 1, 2014, CMS is required to assign a unique billing code if one has not already been assigned by the agency. In addition to assigning thecode, CMS was required to publicly report payment for the tests no later than January 1, 2016. Further, under PAMA, CMS is required to adopt temporarybilling codes to identify new tests and new advanced diagnostic laboratory tests that have been cleared or approved by the FDA.Further, with respect to the Medicare program, Congress has proposed on several occasions to impose a 20% coinsurance charge on patients for clinicallaboratory tests reimbursed under the Medicare Clinical Laboratory Fee Schedule, which would require us to bill patients for these amounts. Because of therelatively low reimbursement for many clinical laboratory tests, in the event that Congress were to ever enact such legislation, the cost of billing andcollecting for these services would often exceed the amount actually received from the patient and effectively increase our costs of billing and collecting.Some of our Medicare claims may be subject to policies issued by Palmetto and Noridian Healthcare Solutions, our former and current MACs for California,respectively. Palmetto has issued a Local Coverage Determination, whereby Palmetto will not cover many molecular diagnostic assays, such as theenumeration component of our current assays, unless the test is expressly included in a National Coverage Determination issued by CMS or a Local CoverageDetermination or coverage article issued by Palmetto. Currently, laboratories may submit coverage determination requests to Palmetto for consideration andapply for a unique billing code for each assay (which is a separate process from the coverage determination). In the event that a non-coverage determinationis issued, the laboratory must wait six months following the determination to submit a new request. Palmetto currently has a negative coverage determinationfor the enumeration component of CTC assays, but there is no such negative coverage determination for the analysis component of such CTC assays. Denial(or continuation of denial) of coverage for the enumeration component of our current and anticipated CTC assays by Palmetto or its successor MAC, NoridianHealthcare Solutions, which adopts coverage policies set by the MolDx program, or reimbursement at inadequate levels, would have a material adverseimpact on our business and on market acceptance of our current assays and our planned future assays. Noridian Healthcare Solutions intends to follow, forCTC assays, the positive or negative coverage determinations which from time to time Palmetto makes as well as any coverage policy changes set by theMolDx program. On November 27, 2013, Palmetto denied our request for coverage for the enumeration/detection portion of our testing. We have notreceived any other indications to suggest that the negative coverage determination will be reversed. The CTC enumeration counts disease burden and is aprognostic test, and although oncologists find this information valuable, it does not meet many of the medical necessity requirements of Medicare and thepayers. We intend to pursue payment for the capture portion of our CTC technology that allows us to run our diagnostic testing for some of our Target-Selector assays.Additionally, the Centers for Disease Control and Prevention, CMS and the Office of Civil Rights issued a final rule in February 2014 to amend both theHIPAA and CLIA regulations. The final rule amended the HIPAA privacy rule to remove the CLIA laboratory exceptions, and as a result, HIPAA-coveredlaboratories are now required to provide individuals, upon request, with access to their completed test reports. Similarly, the final rule amended CLIA to statethat CLIA laboratories and CLIA-exempt laboratories may provide copies of the patient’s completed rest reports that, using the laboratory’s authenticationprocess, can be identified as belonging to that patient.Governmental RegulationsClinical Laboratory Improvement Amendments of 1988 and State RegulationAs a provider of laboratory testing on human specimens for the purpose of diagnosis, prevention, or treatment, we are required to hold certain federal, stateand local licenses, certifications and permits to conduct our business. In 1988, Congress enacted CLIA, which established quality standards for alllaboratories providing testing to ensure the accuracy, reliability and timeliness of patient test results regardless of where the test was performed. Ourlaboratory holds a CLIA certificate of accreditation. As to state laws, we are required to meet certain laboratory licensing and other requirements. Ourlaboratory holds the required licenses from the applicable state agencies in which we operate. For more information on state licensing requirements, see thesections entitled see the section entitled “Governmental Regulations—California State Laboratory Licensing” and “Governmental Regulations—OtherStates’ Laboratory Licensing.”28Under CLIA, a laboratory is defined as any facility which performs laboratory testing on specimens derived from humans for the purpose of providinginformation for the diagnosis, prevention or treatment of disease, or the impairment of, or assessment of health of human beings. CLIA also requires that wehold a certificate applicable to the complexity of the categories of testing we perform and that we comply with certain standards. CLIA further regulatesvirtually all clinical laboratories by requiring they comply with various operational, personnel, facilities administration, quality and proficiency testingrequirements intended to ensure that their clinical laboratory testing services are accurate, reliable and timely. CLIA certification is also a prerequisite to beeligible to be reimbursed for services provided to state and federal health care program beneficiaries. CLIA is user-fee funded. Therefore, all costs ofadministering the program must be covered by the regulated facilities, including certification and survey costs.We are subject to survey and inspection every two years to assess compliance with program standards and may be subject to additional unannouncedinspections. Laboratories performing high complexity testing are required to meet more stringent requirements than laboratories performing less complextests. In addition, a laboratory like ours that is certified as “high complexity” under CLIA may obtain analyte-specific reagents, which are used to developLDTs.In addition to CLIA requirements, we must comply with the standards set by CAP, which accredits our laboratory. Under CMS requirements, accreditation byCAP is sufficient to satisfy the requirements of CLIA. Therefore, because we are accredited by CAP, we are deemed to also comply with CLIA. CLIA alsoprovides that a state may adopt laboratory regulations that are more stringent than those under federal law, and certain states have implemented their ownmore stringent laboratory regulatory schemes.Federal, State and Foreign Fraud and Abuse LawsA variety of federal and state laws prohibit fraud and abuse. These laws are interpreted broadly and enforced aggressively by various state and federalagencies, including CMS, the Department of Justice, the Office of Inspector General for the U.S. Department of Health and Human Services, or HHS, andvarious state agencies. In addition, the Medicare and Medicaid programs increasingly use a variety of contractors to review claims data and to identifyimproper payments as well as fraud and abuse. These contractors include Recovery Audit Contractors, Medicaid Integrity Contractors and Zone ProgramIntegrity Contractors. In addition, CMS conducts Comprehensive Error Rate Testing audits, the purpose of which is to detect improper Medicare payments.Any overpayments identified must be repaid unless a favorable decision is obtained on appeal. In some cases, these overpayments can be used as the basis foran extrapolation, by which the error rate is applied to a larger universe of claims, and which can result in even higher repayments. The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, receiving, or providing remuneration,directly or indirectly, to induce or in return for either the referral of an individual, or the furnishing, recommending, or arranging for the purchase, lease ororder of any health care item or service reimbursable, in whole or in part, under a federal health care program. The definition of “remuneration” has beenbroadly interpreted to include anything of value, including gifts, discounts, credit arrangements, payments of cash, ownership interests and providinganything at less than its fair market value. Recognizing that the federal Anti-Kickback Statute is broad and may technically prohibit many innocuous orbeneficial arrangements within the health care industry, the Office of Inspector General for HHS has issued a series of regulatory “safe harbors.” These safeharbor regulations set forth certain requirements that, if met, will assure immunity from prosecution under the federal Anti-Kickback Statute. Although fullcompliance with these provisions ensures against prosecution under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit withina specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Statute willbe pursued. For further discussion of the impact of federal and state health care fraud and abuse laws and regulations on our business, see the section entitled“Risk Factors—Regulatory Risks Relating to Our Business.” We are subject to federal and state health care fraud and abuse laws and regulations and couldface substantial penalties if we are unable to fully comply with such laws.In addition, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, also created new federal civil and criminal penalties, regardinghealth care fraud and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme todefraud any health care benefit program, including private third-party payers. A violation of this statute is a felony and may result in fines, imprisonment orexclusion from federal health care programs, such as the Medicare and Medicaid programs. The false statements statute prohibits knowingly and willfullyfalsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of orpayment for health care benefits, items or services. A violation of this statute is a felony and may result in fines, imprisonment or exclusion from federalhealth care programs.29Another development affecting the health care industry is the increased enforcement of the federal False Claims Act and, in particular, actions broughtpursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes liability on any person or entity that, among otherthings, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government. The qui tam provisions of the FalseClaims Act allow a private individual to bring actions on behalf of the federal government and permit such individuals to share in any amounts paid by theentity to the government in fines or settlement. In addition, various states have enacted false claim laws analogous to the federal False Claims Act, and someof these state laws apply where a claim is submitted to any third-party payer. When an entity is determined to have violated the False Claims Act, it may berequired to pay up to three times the actual damages sustained by the government, plus significant civil monetary penalties.Additionally, the civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented orcaused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed oris false or fraudulent.Further, the federal Physician Payments Sunshine Act requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment isavailable under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to CMS, information related topayments or other transfers of value made to and teaching hospitals, as well as ownership and investment interests held by physicians and their immediatefamily members.Also, many states have laws similar to those listed above that may be broader in scope and may apply regardless of payer.Additionally, in Europe various countries have adopted anti-bribery laws providing for severe consequences, in the form of criminal penalties and/orsignificant fines for individuals and/or companies committing a bribery offence. Violations of these anti-bribery laws, or allegations of such violations, couldhave a negative impact on our business, results of operations and reputation. For instance, in the United Kingdom, under the Bribery Act 2010, a briberyoccurs when a person offers, gives or promises to give a financial or other advantage to induce or reward another individual to improperly perform certainfunctions or activities, including any function of a public nature. Bribery of foreign public officials also falls within the scope of the Bribery Act 2010. Underthe new regime, an individual found in violation of the Bribery Act 2010 faces imprisonment of up to 10 years. In addition, the individual can be subject toan unlimited fine, as can commercial organizations for failure to prevent bribery. Despite our implementation of robust compliance processes, we may be subject, from time to time, to inspections, investigations, and other enforcementactions by governmental authorities. If we are found not to be in compliance with applicable laws or regulations, the applicable governmental authority canimpose significant civil, criminal and administrative penalties, such as fines, delay, suspend, or revoke regulatory approvals, institute proceedings torecoupment of monies, impose marketing or operating restrictions, enjoin future violations, imprisonment, exclusion from government funded healthcareprograms such as Medicare and Medicaid, integrity oversight and reporting obligations, and assess similar significant penalties against our officers oremployees.Physician Referral ProhibitionsUnder a federal law directed at “self-referral,” commonly known as the Stark Law, there are prohibitions, with certain exceptions, on Medicare and Medicaidpayments for laboratory tests referred by physicians who personally, or through a family member, have a “financial relationship”—including an investmentor ownership interest or a compensation arrangement—with the clinical laboratory performing the tests. Several Stark Law exceptions are relevant toarrangements involving clinical laboratories, including: (1) fair market value compensation for the provision of items or services; (2) payments by physiciansto a laboratory for clinical laboratory services; (3) certain space and equipment rental arrangements that satisfy certain requirements, and (4) personal servicesarrangements that satisfy certain requirements. The laboratory cannot submit claims to the Medicare Part B program for services furnished in violation of theStark Law, and Medicaid reimbursements may be at risk as well. Penalties for violating the Stark Law include significant civil, criminal and administrativepenalties, such as the return of funds received for all prohibited referrals, fines, civil monetary penalties exclusion from the federal health care programsintegrity oversight and reporting obligations, and imprisonment. Many states have comparable laws that are not limited to Medicare and Medicaid referrals.30Corporate Practice of MedicineA number of states, including California, do not allow business corporations to employ physicians to provide professional services. This prohibition againstthe “corporate practice of medicine” is aimed at preventing corporations such as us from exercising control over the medical judgments or decisions ofphysicians. The state licensure statutes and regulations and agency and court decisions that enumerate the specific corporate practice rules vary considerablyfrom state to state and are enforced by both the courts and regulatory authorities, each with broad discretion. If regulatory authorities or other parties in anyjurisdiction successfully assert that we are engaged in the unauthorized corporate practice of medicine, we could be required to restructure our contractualand other arrangements. In addition, violation of these laws may result in significant civil, criminal and administrative penalties, such as sanctions imposedagainst us and/or the professional through licensure proceedings, and exclusion from state and federal health care programs.Direct Billing Laws and Other State Law Restrictions on Billing for Laboratory ServicesLaws and regulations in certain states prohibit laboratories from billing physicians or other purchasers directly for testing that they order. Some of those lawsand regulations apply only to anatomic pathology services while others extend to other types of testing. Some states may allow laboratories to bill physiciansdirectly but may prohibit the physician (and, in some cases, other purchasers) from charging more than the purchase price for the services (or may allow onlyfor the recovery of acquisition costs) or may require disclosure of certain information on the invoice. In some cases, and if not prohibited by law or regulation,we may bill physicians, hospitals and other laboratories directly for the services that they order. An increase in the number of states that impose similarrestrictions could adversely affect us by encouraging physicians to perform laboratory services in-house or by causing physicians to refer services to otherlaboratories that are not subject to the same restrictions.Physician LicensingA number of the states where specimens originate require that the physician interpreting those specimens be licensed by that particular state. Physicians whofail to comply with these licensure requirements could face fines or other penalties for practicing medicine without a license and we could be required to paythose fines on behalf of our pathologists or subject to liability under the federal False Claims Act and similar state laws if we bill for services furnished byunlicensed pathologists. We do not believe that the services our pathologists perform constitute the practice of medicine in any state in which ourpathologists are not licensed.In addition, many states also prohibit the splitting or sharing of fees between physicians and non-physician entities. We do not believe that our contractualarrangements with physicians, physician group practices or hospitals will subject us to claims under such regulations. However, changes in the laws maynecessitate modifications in our relationships with our clients.California State Laboratory LicensingOur laboratory is licensed and in good standing under the State of California Department of Public Health standards. Our current licenses permit us to receivespecimens obtained in California.California state laws and regulations also establish standards for the day-to-day operations of clinical laboratories, including physical facility requirementsand equipment, quality control and proficiency testing requirements. If we are found to be out of compliance with California statutory or regulatorystandards, we may be subject to suspension, restriction or revocation of our laboratory license or assessed civil money penalties. The operator of anoncompliant laboratory may also be found guilty of a misdemeanor under California law. A finding of noncompliance, therefore, may result in harm to ourbusiness.Other States’ Laboratory LicensingSeveral states require the licensure of out-of-state laboratories that accept specimens from those states. We hold licenses from the states of Maryland,Pennsylvania and Rhode Island to test specimens from patients in those states or received from ordering physicians in those states. We are currently in theprocess of addressing the requirements for licensure in New York.31From time to time, other states may require out of state laboratories to obtain licensure in order to accept specimens from such states. If we identify any otherstate with such requirements or if we are contacted by any other state advising us of such requirements, we intend to follow instructions from the stateregulators as to how we should comply with such requirements.U.S. Food and Drug AdministrationWe provide our assays as LDTs. Historically; the FDA has exercised enforcement discretion with respect to most LDTs and has not required laboratories thatoffer LDTs to comply with the agency’s requirements for medical devices (e.g., establishment registration, device listing, quality systems regulations,premarket clearance or premarket approval, and post-market controls). In recent years, however, the FDA has stated it intends to end its policy of enforcementdiscretion and regulate certain LDTs as medical devices. To this end, on October 3, 2014, the FDA issued two draft guidance documents, entitled “Frameworkfor Regulatory Oversight of Laboratory Developed Tests (LDTs)” and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests(LDTs)”, respectively, that set forth a proposed risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. The FDA hasindicated that it does not intend to modify its policy of enforcement discretion until the draft guidance documents are finalized. In January 2017, the FDAannounced that final guidance on the oversight of LDTs would allow for further public discussion. On January 13, 2017 the FDA issued a “Discussion Paperon Laboratory Developed Tests (LDTs),” which states that the material in the document does not represent a final version of the LDT draft guidancedocuments that were published in 2014 or position of the FDA; rather, the document is a method to encourage additional dialogue. The timing of when, if atall, the draft guidance documents will be finalized is unclear, and even then, the new regulatory requirements are proposed to be phased-in consistent withthe schedule set forth in the guidance. Nevertheless, the FDA may decide to regulate certain LDTs on a case-by-case basis at any time. LDTs with the sameintended use as a cleared or approved companion diagnostic are defined in FDA’s draft guidance as “high-risk LDTs (Class III medical devices)” for whichpremarket review would be first to occur.We provide our Target Selector Kit Product, ctDNA, EGFR, for research use only, or RUO, applications, although our customers may use these products todevelop their own products that are subject to regulation by the FDA. RUO products fall under the FDA’s jurisdiction if they are used for clinical rather thanresearch purposes. Consequently, our products are labeled “For Research Use Only.” The FDA’s 2013 Guidance for Industry and Food and DrugAdministration Staff on “Distribution of In Vitro Diagnostic Products Labeled for Research Use Only or Investigational Use Only,” explains that the FDA willreview the totality of the circumstances when evaluating whether equipment and testing components are properly labeled as RUO. Merely including alabeling statement that a product is intended for research use only will not necessarily exempt the device from the FDA’s 510(k) clearance, premarketapproval, or other requirements, if the circumstances surrounding the distribution of the product indicate that the manufacturer intends its product to be usedfor clinical diagnostic use. These circumstances may include written or verbal marketing claims or links to articles regarding a product’s performance inclinical applications, a manufacturer’s provision of technical support for clinical validation or clinical applications, or solicitation of business from clinicallaboratories, all of which could be considered evidence of intended uses that conflict with RUO labeling.Failure to comply with applicable FDA regulatory requirements may trigger a range of enforcement actions by the FDA including warning letters, civilmonetary penalties, injunctions, criminal prosecution, recall or seizure, operating restrictions, partial suspension or total shutdown of production, and denialof or challenges to applications for clearance or approval, as well as significant adverse publicity.Other Regulatory RequirementsOur laboratory is subject to federal, state and local regulations relating to the handling and disposal of regulated medical waste, hazardous waste andbiohazardous waste, including chemical, biological agents and compounds, blood and bone marrow samples and other human tissue. Typically, we useoutside vendors who are contractually obligated to comply with applicable laws and regulations to dispose of such waste. These vendors are licensed orotherwise qualified to handle and dispose of such waste.The Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for health care employers, includingrequirements to develop and implement programs to protect workers from exposure to blood-borne pathogens by preventing or minimizing any exposurethrough needle stick or similar penetrating injuries.32EmployeesAs of December 31, 2018, we had a total of 87 full-time employees, 8 of whom hold doctorate degrees and 11 of whom are engaged in full-time research anddevelopment activities, as well as 4 part-time employees. None of our employees is represented by a labor union.Available InformationOur website address is www.biocept.com. We post links to our website to the following filings as soon as reasonably practicable after they are electronicallyfiled with or furnished to the Securities and Exchange Commission, or the SEC: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, proxy statements, and any amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934, as amended. All such filings are available through our website free of charge. The SEC also maintains an internet site at www.sec.gov that containsreports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.Company InformationWe maintain our principal executive offices at 5810 Nancy Ridge Drive, San Diego, California 92121. Our telephone number is (858) 320-8200 and ourwebsite address is www.biocept.com. The information contained in, or that can be accessed through, our website is not incorporated into and is not part ofthis annual report. We were incorporated in California on May 12, 1997 and reincorporated as a Delaware corporation on July 30, 2013.33Item 1A. Risk FactorsAn investment in our securities involves a high degree of risk. You should consider carefully the risks described below, together with all of the otherinformation included in this Annual Report, as well as in our other filings with the SEC, in evaluating our business. If any of the following risks actuallyoccur, our business, financial condition, operating results and future prospects could be materially and adversely affected. In that case, the trading price ofour common stock may decline and you might lose all or part of your investment. The risks described below are not the only ones we face. Additional risksthat we currently do not know about or that we currently believe to be immaterial may also impair our business, financial condition, operating results andprospects. Certain statements below are forward-looking statements. For additional information, see the information included under the heading “SpecialNote Regarding Forward-Looking Statements.”Risks Relating to Our Financial Condition and Capital RequirementsWe are an early stage molecular oncology diagnostics company with a history of net losses; we expect to incur net losses in the future, and we may neverachieve sustained profitability.We have historically incurred substantial net losses, including net losses of $21.6 million and $24.6 million for the years ended December 31, 2017 and2018, respectively, and we have never been profitable. At December 31, 2018, our accumulated deficit was approximately $220.5 million. Before 2008, wewere pursuing a business plan relating to fetal genetic disorders and other fields, all of which were unrelated to cancer diagnostics. The portion of ouraccumulated deficit that relates to the period from inception through December 31, 2007 is approximately $66.5 million.We expect our losses to continue as a result of costs relating to our laboratory operations as well as increased sales and marketing costs and ongoing researchand development expenses. These losses have had, and will continue to have, an adverse effect on our working capital, total assets and stockholders’ equity.Because of the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict when we will become profitable, andwe may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.Our inability to achieve and then maintain profitability would negatively affect our business, financial condition, results of operations and cash flows.We need to raise additional capital to continue as a going concern.We expect to continue to incur losses for the foreseeable future and will have to raise additional capital to fund our planned operations and to meet our long-term business objectives. As a result, there is substantial doubt about our ability to continue as a going concern unless we are able to successfully raiseadditional capital. Until we can generate significant cash from operations, including product and assay revenues, we expect to continue to fund ouroperations with the proceeds from offerings of our equity securities or debt, or transactions involving product development, technology licensing orcollaboration. We can provide no assurances that any sources of a sufficient amount of financing will be available to us on favorable terms, if at all. Failure toraise additional capital in sufficient amounts would significantly impact our ability to continue as a going concern. The actual amount of funds that we willneed and the timing of any such investment will be determined by many factors, some of which are beyond our control.Risks Relating to Our Business and StrategyIf we are unable to increase sales of our current products, assays and services or successfully develop and commercialize other products, assays andservices, our revenues will be insufficient for us to achieve profitability.We currently derive substantially all of our revenues from sales of diagnostic assays. We began offering our assays through our Clinical LaboratoryImprovement Amendments of 1988, or CLIA, certified, CAP accredited, and state-licensed laboratory in 2014. Additionally, the sale of our proprietary bloodcollection tubes, or BCTs commenced in June 2018, which allow for the intact transport of liquid biopsy samples for research use only, or RUO, from regionsaround the world. We are in varying stages of research and development for other products and diagnostic assays that we may offer. If we are unable toincrease sales of our existing products and diagnostic assays or successfully develop and commercialize other products and diagnostic assays, we will notproduce sufficient revenues to become profitable.34If we are unable to execute our sales and marketing strategy for our products and diagnostic assays and are unable to gain acceptance in the market, wemay be unable to generate sufficient revenue to sustain our business.We are an early stage molecular oncology diagnostics company and have engaged in only limited sales and marketing activities for the diagnostic assays wecurrently offer through our CLIA-certified, CAP accredited, and state-licensed laboratory. To date, our revenue has been insufficient to fund operations.Although we believe that our current assays and our planned future assays, as well as our BCT product, represent a promising commercial opportunity, ourproducts or assays may never gain significant acceptance in the marketplace and therefore may never generate substantial revenue or profits for us. We willneed to establish a market for our products and diagnostic assays and build that market through physician education, awareness programs and the publicationof clinical trial results. Gaining acceptance in medical communities requires, among other things, publications in leading peer-reviewed journals of resultsfrom studies using our current products, assays and services and/or our planned future products, assays and services. The process of publication in leadingmedical journals is subject to a peer review process and peer reviewers may not consider the results of our studies sufficiently novel or worthy of publication.Failure to have our studies published in peer-reviewed journals would limit the adoption of our current products, assays and services and our planned futureproducts, assays and services.Our ability to successfully market the products and diagnostic assays that we have developed, and may develop in the future, will depend on numerousfactors, including:•conducting clinical utility studies of such assays in collaboration with key thought leaders to demonstrate their use and value in important medicaldecisions such as treatment selection;•whether our current or future partners, vigorously support our offerings;•the success of our sales force;•whether healthcare providers believe such diagnostic assays provide clinical utility;•whether the medical community accepts that such diagnostic assays are sufficiently sensitive and specific to be meaningful in-patient care andtreatment decisions;•our ability to continually source raw materials, BCTs, shipping kits and other products that we sell or consume in our manufacturing process that areof sufficient quality and supply;•our ability to continue to fund planned sales and marketing activities; and•whether private health insurers, government health programs and other third-party payers will adopt liquid biopsy-based assays in their guidelines, orcover such diagnostic assays and, if so, whether they will adequately reimburse us.Failure to achieve widespread market acceptance of our current products, assays and services, as well as our planned future products, assays and services,would materially harm our business, financial condition and results of operations. If we cannot develop products, assays and services to keep pace with rapid advances in technology, medicine and science, our operating results andcompetitive position could be harmed.In recent years, there have been numerous advances in technologies relating to the diagnosis and treatment of cancer. Several new cancer drugs have beenapproved, and a number of new drugs in clinical development may increase patient survival time. There have also been advances in methods used to identifypatients likely to benefit from these drugs based on analysis of biomarkers. We must continuously develop new products and diagnostic assays and enhanceany existing products, assays and services to keep pace with evolving standards of care. Our current products, assays and services and our planned futureproducts, assays and services could become obsolete unless we continually innovate and expand them to demonstrate benefit in the diagnosis, monitoring orprognosis of patients with cancer. New cancer therapies typically have only a few years of clinical data associated with them, which limits our ability todevelop products and diagnostic assays based on, for example, biomarker analysis related to the appearance or development of resistance to those therapies.If we cannot adequately demonstrate the applicability of our current products, assays and services and our planned future products, assays and services to newtreatments, by incorporating important biomarker analysis, sales of our products, assays and services could decline, which would have a material adverseeffect on our business, financial condition and results of operations.35If our current products, assays and services and our planned future products, assays and services do not continue to perform as expected, our operatingresults, reputation and business will suffer.Our success depends on the market’s confidence that we can continue to provide reliable, high-quality products and assay results. We believe that ourcustomers are likely to be particularly sensitive to product or assay defects and errors. As a result, the failure of our current or planned future products orassays to perform as expected, including with respect to our ability to maintain the sensitivity, specificity, concordance or reproducibility of such assays,would significantly impair our reputation and the public image of our products and cancer assays, and we may be subject to legal claims arising from anydefects or errors.If our sole laboratory facility becomes damaged or inoperable, or we are required to vacate the facility, our ability to sell and provide our products anddiagnostic assays and pursue our research and development efforts may be jeopardized.We currently derive our revenues from our diagnostic assays conducted in our CLIA-certified, CAP accredited, and state-licensed laboratory. We do not haveany clinical reference laboratory facilities other than our facility in San Diego, California. Our facilities and equipment could be harmed or renderedinoperable by natural or man-made disasters, including fire, earthquake, flooding and power outages, which may render it difficult or impossible for us to sellour products or perform our diagnostic assays for some period of time. The inability to sell our current or planned future products, or to perform our currentassays and our planned future assays, or the backlog of assays that could develop if our facility is inoperable for even a short period of time, may result in theloss of customers or harm to our reputation or relationships with scientific or clinical collaborators, and we may be unable to regain those customers or repairour reputation in the future. Furthermore, our facilities and the equipment we use to perform our research and development work could be costly and time-consuming to repair or replace.The San Diego area has recently experienced serious fires and power outages and is considered to lie in an area with earthquake risk.Additionally, a key component of our research and development process involves using biological samples as the basis for our diagnostic assaydevelopment. In some cases, these samples are difficult to obtain. If the parts of our laboratory facility where we store these biological samples were damagedor compromised, our ability to pursue our research and development projects, as well as our reputation, could be jeopardized. We carry insurance for damageto our property and the disruption of our business, but this insurance may not be sufficient to cover all of our potential losses and may not continue to beavailable to us on acceptable terms, if at all.Further, if our CLIA-certified, CAP accredited, and state-licensed laboratory became inoperable we may not be able to license or transfer our technology toanother facility with the necessary qualifications, including state licensure and CLIA certification, under the scope of which our current assays and ourplanned future assays could be performed. Even if we find a facility with such qualifications to perform our assays, it may not be available to us oncommercially reasonable terms.If we cannot compete successfully with our competitors, we may be unable to increase or sustain our revenues or achieve and sustain profitability.Our principal competition comes from mainstream diagnostic methods, used by medical oncologists, surgical oncologists, urologists, pulmonologists,pathologists and other physicians for many years, which focus on tumor tissue analysis. The methods or behavior of medical oncologists, surgicaloncologists, urologists, pulmonologists, pathologists and other physicians may be difficult to change regarding the use of our CTC and ctDNA assays,including molecular diagnostic assays, in their practices in conjunction with or instead of tissue biopsies and analysis. In addition, companies offeringcapital equipment, BCTs, and kits or reagents to local pathology laboratories or laboratory supply distributors represent another source of potentialcompetition. These kits are used directly by the pathologist, which can facilitate adoption. Historically, we have focused our marketing and sales efforts onmedical oncologists rather than pathologists, although commencing in October 2017, our Empower TC offering provides the unique ability for pathologiststo participate in the interpretation of liquid biopsy results and is available to pathology practices and hospital systems throughout the United States.36We also face competition from companies that offer products or are conducting research to develop products for CTC or ctDNA assays in various cancers.CTC and ctDNA products, assays and services represent a new area of science and we cannot predict what products or assays others will develop that maycompete with or provide results similar or superior to the results we are able to achieve with the products or assays we develop. Competitors include but arenot limited to companies such as Atossa, Qiagen, Roche, Guardant Health, Cancer Genetics, Agena Bioscience, Alere (Adnagen), Illumina, Grail, Apocell,EPIC Sciences, Clearbridge Biomedics, Biodesix, Thermo Fisher Scientific, Foundation Medicine, Neogenomics, Cynvenio Biosystems, Genomic Health,Fluxion Biosciences, RareCells, ScreenCell, Menarini Silicon Biosystems, Sysmex, Natera, Inc., Circulogen, Angle PLC, Caris Life Sciences, Archer DX, andTempus. Some of these groups, in addition to operating research and development laboratories, are establishing CLIA-certified testing laboratories whileothers are focused on selling equipment and reagents.There are a number of companies which are focused on the oncology diagnostic market, such as Agendia, who while not currently offering CTC or ctDNAassays are selling to the medical oncologists and pathologists and could develop or offer CTC or ctDNA assays. Large laboratory services companies such asQuest and LabCorp provide more generalized cancer diagnostic assays and testing but could also offer a CTC or ctDNA assay service. Companies likeAbbott, Danaher and others could develop equipment or reagents in the future as well. Currently, companies like Streck, Roche and Exact Sciences offerBCTs, and in the future, companies like Covidien, Beckton Dickinson, Thermo Fisher, and other large medical device companies may develop BCTs as well.There are a number of companies that are focused on the oncology diagnostic market such as Illumina, Biorad, Sysmex, Precipio, Qiagen and Thermo FisherScientific that are selling equipment and reagents kits for ctDNA assays and assay panels to laboratories that are developing tests that are marketed to medicaloncologists and pathologists.Some of our present and potential competitors have widespread brand recognition and substantially greater financial and technical resources anddevelopment, production and marketing capabilities than we do. Others may develop lower-priced, less complex assays that payers, medical oncologists,surgical oncologists, urologists, pulmonologists, pathologists and other physicians could view as functionally equivalent to our current or planned futureassays, which could force us to lower the list price of our assays and impact our operating margins and our ability to achieve and maintain profitability. Inaddition, technological innovations that result in the creation of enhanced products or diagnostic tools that are more sensitive or specific than ours mayenable other clinical laboratories, hospitals, physicians or medical providers to provide specialized products or diagnostic assays similar to ours in a morepatient-friendly, efficient or cost-effective manner than is currently possible. If we cannot compete successfully against current or future competitors, we maybe unable to increase or create market acceptance and sales of our current or planned future products or assays, which could prevent us from increasing orsustaining our revenues or achieving or sustaining profitability.We expect that biopharmaceutical companies will increasingly focus attention and resources on the personalized cancer diagnostic sector as the potentialand prevalence of molecularly targeted oncology therapies approved by the FDA along with companion diagnostics increases. For example, the FDA hasapproved three such agents: Xalkori® from Pfizer Inc. along with its companion anaplastic lymphoma kinase FISH test from Abbott Laboratories, Inc.,Zelboraf® from Daiichi-Sankyo/Genentech/Roche along with its companion BRAF kinase V600 mutation test from Roche Molecular Systems, Inc. andTafinlar® from GlaxoSmithKline along with its companion BRAF kinase V600 mutation test from bioMerieux. Since companion diagnostic tests are part ofFDA labeling, non-FDA cleared tests such as ours would be considered an off-label use and this may limit our access to this market segment.Additionally, projects related to cancer diagnostics and particularly genomics have received increased government funding, both in the United States andinternationally. As more information regarding cancer genomics becomes available to the public, we anticipate that more products aimed at identifyingtargeted treatment options will be developed and that these products may compete with ours. In addition, competitors may develop their own versions of ourcurrent or planned future products or assays in countries where we did not apply for patents or where our patents have not issued and compete with us in thosecountries, including encouraging the use of their product or assay by physicians or patients in other countries.37We expect to continue to incur significant expenses to develop and market products and diagnostic assays, which could make it difficult for us to achieveand sustain profitability.In recent years, we have incurred significant costs in connection with the development of our products and diagnostic assays. For the years endedDecember 31, 2017 and 2018, our research and development expenses were $3.4 million and $4.5 million, respectively, and our sales and marketingexpenses were $6.3 million and $5.9 million, respectively. We expect our expenses to continue to increase for the foreseeable future as we conduct studies ofour current products, assays and services and our planned future products, assays and services, continue to establish our sales and marketing organization,drive adoption of and reimbursement for our products and diagnostic assays and develop new products, assays and services. As a result, we need to generatesignificant revenues in order to achieve sustained profitability.If medical oncologists, surgical oncologists, urologists, pulmonologists, pathologists and other physicians decide not to order our current or plannedfuture assays, or if laboratory supply distributors or their customers decide not to order our current or planned future products, we may be unable togenerate sufficient revenue to sustain our business.To generate demand for our current products, assays and services and our planned future products, assays and services, we will need to educate medicaloncologists, surgical oncologists, urologists, pulmonologists, pathologists, and other physicians and other health care professionals, as well as laboratory andmedical equipment suppliers, on the clinical utility, benefits and value of the products, assays and services we provide through published papers,presentations at scientific conferences, educational programs and one-on-one education sessions by members of our sales force. In addition, we need toeducate medical oncologists, surgical oncologists, urologists, pulmonologists, pathologists and other physicians of our ability to obtain and maintaincoverage and adequate reimbursement from third-party payers. We need to hire additional commercial, scientific, technical and other personnel to supportthis process. Unless an adequate number of medical practitioners order our current assays and our planned future assays, or unless an adequate number oflaboratory supply distributors order our current and planned future products, we will likely be unable to create demand in sufficient volume for us to achievesustained profitability.Clinical utility studies are important in demonstrating to both customers and payers an assay’s clinical relevance and value. If we are unable to identifycollaborators willing to work with us to conduct clinical utility studies, or the results of those studies do not demonstrate that an assay provides clinicallymeaningful information and value, commercial adoption of such assay may be slow, which would negatively impact our business.Clinical utility studies show when and how to use a clinical test or assay and describe the particular clinical situations or settings in which it can be appliedand the expected results. Clinical utility studies also show the impact of the test or assay results on patient care and management. Clinical utility studies aretypically performed with collaborating oncologists or other physicians at medical centers and hospitals, analogous to a clinical trial, and generally result inpeer-reviewed publications. Sales and marketing representatives use these publications to demonstrate to customers how to use a clinical test or assay, as wellas why they should use it. These publications are also used with payers to obtain coverage for a test or assay, helping to assure there is appropriatereimbursement.We need to conduct additional studies for our assays, increase assay adoption in the marketplace and obtain coverage and adequate reimbursement. Shouldwe not be able to perform these studies, or should their results not provide clinically meaningful data and value for medical oncologists, surgical oncologists,urologists, pulmonologists, pathologists and other physicians, adoption of our assays could be impaired, and we may not be able to obtain coverage andadequate reimbursement for them.The loss of key members of our executive management team could adversely affect our business.Our success in implementing our business strategy depends largely on the skills, experience and performance of key members of our executive managementteam and others in key management positions, including Michael W. Nall, our Chief Executive Officer and President, Lyle J. Arnold, Ph.D., our Senior Vice-President of Research & Development and Chief Scientific Officer, Michael Terry, our Senior Vice President Corporate Development, Edwin Hendrick, ourSenior Vice President Chief Commercial Officer, and Timothy C. Kennedy, our Chief Financial Officer, Senior Vice President of Operations and Secretary.The collective efforts of each of these persons and others working with them as a team are critical to us as we continue to develop our technologies, products,services, assays and research and development and sales programs. As a result of the difficulty in locating qualified new management, the loss or incapacityof existing members of38our executive management team could adversely affect our operations. If we were to lose one or more of these key employees, we could experiencedifficulties in finding qualified successors, competing effectively, developing our technologies and implementing our business strategy. Our executivemanagement team each have employment agreements, however, the existence of an employment agreement does not guarantee retention of members of ourexecutive management team and we may not be able to retain those individuals for the duration of or beyond the end of their respective terms. We do notmaintain “key person” life insurance on any of our employees.In addition, we rely on collaborators, consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research anddevelopment and commercialization strategy. Our collaborators, consultants and advisors are generally employed by employers other than us and may havecommitments under agreements with other entities that may limit their availability to us.The loss of a key employee, the failure of a key employee to perform in his or her current position or our inability to attract and retain skilled employeescould result in our inability to continue to grow our business or to implement our business strategy.There is a scarcity of experienced professionals in our industry. If we are not able to retain and recruit personnel with the requisite technical skills, we maybe unable to successfully execute our business strategy.The specialized nature of our industry results in an inherent scarcity of experienced personnel in the field. Our future success depends upon our ability toattract and retain highly skilled personnel, including scientific, technical, commercial, business, regulatory and administrative personnel, necessary tosupport our anticipated growth, develop our business and perform certain contractual obligations. Given the scarcity of professionals with the scientificknowledge that we require and the competition for qualified personnel among life science businesses, we may not succeed in attracting or retaining thepersonnel we require to continue and grow our operations.Our failure to continue to attract, hire and retain a sufficient number of qualified sales professionals would hamper our ability to increase demand for ourproducts and diagnostic assays, to expand geographically and to successfully commercialize any other products or assays we may develop.To succeed in selling our products and diagnostic assays and any other products or assays that we are able to develop, we must expand our sales force in theUnited States and/or internationally by recruiting additional sales representatives with extensive experience in oncology and established relationships withmedical oncologists, surgical oncologists, urologists, pulmonologists, pathologists, oncology nurses, and other physicians and hospital personnel, as well aslaboratory supply distributors. To achieve our marketing and sales goals, we will need to continue to build our sales and commercial infrastructure. Salesprofessionals with the necessary technical and business qualifications are in high demand, and there is a risk that we may be unable to attract, hire and retainthe number of sales professionals with the right qualifications, scientific backgrounds and relationships with decision-makers at potential customers neededto achieve our sales goals. We expect to face competition from other companies in our industry, some of whom are much larger than us and who can paygreater compensation and benefits than we can, in seeking to attract and retain qualified sales and marketing employees. If we are unable to hire and retainqualified sales and marketing personnel, our business will suffer.Our dependence on commercialization partners for sales of products, assays and services could limit our success in realizing revenue growth.We intend to grow our business through the use of commercialization partners for the sales, marketing and commercialization of our current products, assaysand services, as well as our planned future products, assays and services, and to do so we must enter into agreements with these partners to sell, market orcommercialize our products, assays and services. These agreements may contain exclusivity provisions and generally cannot be terminated without causeduring the term of the agreement. We may need to attract additional partners to expand the markets in which we sell products or assays. These partners maynot commit the necessary resources to market and sell our products and diagnostics assays to the level of our expectations, and we may be unable to locatesuitable alternatives should we terminate our agreement with such partners or if such partners terminate their agreement with us.If current or future commercialization partners do not perform adequately, or we are unable to locate commercialization partners, we may not realize revenuegrowth.39We depend on third parties for the supply of blood samples and other biological materials that we use in our research and development efforts. If the costsof such samples and materials increase or our third-party suppliers terminate their relationship with us, our business may be materially harmed.We have relationships with suppliers and institutions that provide us with blood samples and other biological materials that we use in developing andvalidating our current assays and our planned future assays. If one or more suppliers terminate their relationship with us or are unable to meet ourrequirements for samples, we will need to identify other third parties to provide us with blood samples and biological materials, which could result in a delayin our research and development activities and negatively affect our business. In addition, as we grow, our research and academic institution collaboratorsmay seek additional financial contributions from us, which may negatively affect our results of operations.We currently rely on third-party suppliers for our BCTs, shipping kits, and critical materials needed to perform our current assays, as well as our plannedfuture products, assays and services, and any problems experienced by them could result in a delay or interruption of their supply to us.We currently purchase our BCTs and raw materials for our microfluidic channels and assay reagents under purchase orders and do not have long-termcontracts with most of the suppliers of these materials. If suppliers were to delay or stop producing our BCTs, shipping kits, materials or reagents, or if theprices they charge us were to increase significantly, or if they elected not to sell to us, we would need to identify other suppliers. We could experience delaysin obtaining BCTs and shipping kits, manufacturing the microfluidic channels, or performing assays while finding another acceptable supplier, which couldimpact our results of operations. The changes could also result in increased costs associated with qualifying the new BCTs, shipping kits, materials orreagents and in increased operating costs. Further, any prolonged disruption in a supplier’s operations could have a significant negative impact on our abilityto perform diagnostic assays in a timely manner and sell our products. Some of the components used in our current or planned future products are currently sourced from a supplier for which alternative suppliers exist but we havenot validated the products of such alternative suppliers, and substitutes for these components might not be able to be obtained easily or may requiresubstantial design or manufacturing modifications. Any significant problem experienced by any one of our suppliers may result in a delay or interruption inthe supply of components to us until that supplier cures the problem or an alternative source of the component is located and qualified. Any delay orinterruption would likely lead to a delay or interruption in our manufacturing operations or product sales. The inclusion of substitute components must meetour product specifications and could require us to qualify the new supplier with the appropriate government regulatory authorities.If we were sued for product liability or professional liability, we could face substantial liabilities that exceed our resources.The marketing, sale and use of our products and current assays, as well our planned future products, assays and services, could lead to the filing of productliability claims against us if someone alleges that our products or assays failed to perform as designed. We may also be subject to liability for errors in theassay results we provide to physicians or for a misunderstanding of, or inappropriate reliance upon, the information we provide. A product liability orprofessional liability claim could result in substantial damages and be costly and time-consuming for us to defend.Although we believe that our existing product and professional liability insurance is adequate, our insurance may not fully protect us from the financialimpact of defending against product liability or professional liability claims. Any product liability or professional liability claim brought against us, with orwithout merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuitcould damage our reputation, result in the recall of products or assays, or cause current partners to terminate existing agreements and potential partners toseek other partners, any of which could impact our results of operations.If we use biological and hazardous materials in a manner that causes injury, we could be liable for damages.Our activities currently require the controlled use of potentially harmful biological materials and chemicals. We cannot eliminate the risk of accidentalcontamination 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, and any liability could exceed our resources or any applicable insurance coverage we may have.Additionally, we are subject to, on an ongoing basis, federal, state and local laws and regulations governing the use, storage, handling and disposal of these40materials and specified waste products. The cost of compliance with these laws and regulations may become significant and could have a material adverseeffect on our financial condition, results of operations and cash flows. In the event of an accident or if we otherwise fail to comply with applicableregulations, we could lose our permits or approvals or be held liable for damages or penalized with fines.We may acquire other businesses or 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.As part of our business strategy, we may pursue acquisitions of businesses and assets. We also may pursue strategic alliances and joint ventures that leverageour core technology and industry experience to expand our offerings or distribution. We have no experience with acquiring other companies and limitedexperience with forming strategic alliances and joint ventures. We may not be able to find suitable partners or acquisition candidates, and we may not be ableto complete such transactions on favorable terms, if at all. If we make any acquisitions, we may not be able to integrate these acquisitions successfully intoour existing business, and we could assume unknown or contingent liabilities. Any future acquisitions also could result in significant write-offs or theincurrence of debt and contingent liabilities, any of which could have a material adverse effect on our financial condition, results of operations and cashflows. Integration of an acquired company also may disrupt ongoing operations and require management resources that would otherwise focus on developingour existing business. We may experience losses related to investments in other companies, which could have a material negative effect on our results ofoperations. 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 anticipatedbenefits of any acquisition, technology license, strategic alliance or joint venture.To finance any acquisitions or joint ventures, we may choose to issue shares of our common stock as consideration, which would dilute the ownership of ourstockholders. If the price of our common stock is low or volatile, we may not be able to acquire other companies or fund a joint venture project using ourstock as consideration. Alternatively, it may be necessary for us to raise additional funds for acquisitions through public or private financings. Additionalfunds may not be available on terms that are favorable to us, or at all.If we cannot support demand for our current products, assays and services, as well as our planned future products, assays and services, includingsuccessfully managing the evolution of our laboratory service, our business could suffer.As our product and assay volume grows, we will need to increase our assay capacity, implement automation, increase our scale and related processing,customer service, billing, collection and systems process improvements and expand our internal quality assurance program and technology to support assayson a larger scale. Examples of challenges we may face include, but are not limited to, maintaining the same validated sensitivity in our assays for both CTCand ctDNA analysis as our assay volume increases. We will also need additional clinical laboratory scientists and other scientific and technical personnel toprocess these additional assays. Any increases in scale, related improvements and quality assurance may not be successfully implemented and appropriatepersonnel may not be available. As additional products, assays and services are commercialized, we may need to bring new equipment on line, implementnew systems, technology, controls and procedures and hire personnel with different qualifications. Failure to implement or maintain necessary procedures orto hire the necessary personnel could result in a higher cost of processing or an inability to meet market demand. We cannot assure you that we will be able toperform assays on a timely basis, or procure BCTs, shipping kits or other materials we sell, at a level consistent with demand, that our efforts to scale ourcommercial operations will not negatively affect the quality of our assay results, or that we will respond successfully to the growing complexity of ouroperations. If we encounter difficulty meeting market demand or quality standards for our current products, assays and services and our planned futureproducts, assays and services, including with respect to our assays our ability to maintain the sensitivity, specificity, concordance and reproducibility of suchassays, our reputation could be harmed, and our future prospects and business could suffer, which may have a material adverse effect on our financialcondition, results of operations and cash flows.Billing for our diagnostic assays is complex, and we must dedicate substantial time and resources to the billing process to be paid.Billing for clinical laboratory assay services is complex, time-consuming and expensive. Depending on the billing arrangement and applicable law, we billvarious payers, including Medicare, insurance companies and patients, all of which have different billing requirements. We generally bill third-party payersfor our diagnostic assays and pursue reimbursement on a case-by-case basis where pricing contracts are not in place. To the extent laws or contracts require usto bill patient co-41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 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 assays and the reimbursement rates of payers;•compliance with complex federal and state regulations related to billing Medicare;•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 advancednotification;•the effect of patient co-payments or co-insurance;•changes to billing codes and/or coverage policies that apply to our assays;•incorrect or missing billing information; and•the resources required to manage the billing and claims appeals process.We use standard industry billing codes, known as Current Procedural Terminology, or CPT, codes, to bill for our diagnostic assays. These codes can changeover 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 theamount of the payment received. Coding changes, therefore, may have an adverse effect on our revenues. There can be no assurance that payers willrecognize 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 inerrors, delays in payments and a related increase in accounts receivable balances.As we introduce new assays, we will need to add new codes to our billing process as well as our financial reporting systems. Failure or delays in effectingthese changes in external billing and internal systems and processes could negatively affect our collection rates, revenue and cost of collecting.Additionally, our billing activities require us to implement compliance procedures and oversight, train and monitor our employees, challenge coverage andpayment denials, assist patients in appealing claims, and undertake internal audits to evaluate compliance with applicable laws and regulations as well asinternal compliance policies and procedures. Payers also conduct external audits to evaluate payments, which add further complexity to the billing process. Ifthe payer makes an overpayment determination, there is a risk that we may be required to return some portion of prior payments we have received. Thesebilling complexities, and the related uncertainty in obtaining payment for our assays, could negatively affect our revenue and cash flow, our ability toachieve profitability, and the consistency and comparability of our results of operations.We rely on third-party billing provider software, and an in-house billing function, to transmit claims to payers, and any delay in transmitting claims couldhave an adverse effect on our revenue.While we manage the overall processing of claims, we rely on third-party billing provider software to transmit the actual claims to payers based on thespecific payer billing format. We have previously experienced delays in claims processing when our third-party provider made changes to its invoicingsystem. Additionally, coding for diagnostic assays may change, and such changes may cause short-term billing errors that may take significant time toresolve. 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 software provider tohandle claim submissions, we may experience delays in our ability to process these claims and receipt of payments from payers, or possibly denial of claimsfor lack of timely submission, which would have an adverse effect on our revenue and our business.42We may encounter manufacturing problems or delays that could result in lost revenue.We currently manufacture our proprietary microfluidic channels at our San Diego facility and intend to continue to do so. We believe we currently haveadequate manufacturing capacity for our microfluidic channels. If demand for our current products, assays and services and our planned future products,assays and services increases significantly, we will need to either expand our manufacturing capabilities or outsource to other manufacturers. If we or third-party manufacturers engaged by us fail to manufacture and deliver our microfluidic channels or certain reagents in a timely manner, our relationships with ourcustomers could be seriously harmed. We cannot assure you that manufacturing, or quality control problems will not arise as we attempt to increase theproduction of our microfluidic channels or reagents or that we can increase our manufacturing capabilities and maintain quality control in a timely manner orat commercially reasonable costs. If we cannot manufacture our microfluidic channels consistently on a timely basis because of these or other factors, it couldhave a significant negative impact on our ability to perform assays and generate revenues.International expansion of our business would expose us to business, regulatory, political, operational, financial and economic risks associated withdoing business outside of the United States.Our business strategy is to pursue increased international expansion, including partnering with academic and commercial testing laboratories, andintroducing our technology outside the United States as part of IVD test kits and/or testing systems utilizing our technologies. Doing business internationallyinvolves a number of risks, including:•multiple, conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, regulatory requirementsand other governmental approvals, permits and licenses;•failure by us or our distributors to obtain regulatory approvals for the sale or use of our current products or assays and our planned future products orassays in various countries;•difficulties in managing foreign operations;•complexities associated with managing government payer systems, multiple payer-reimbursement regimes or self-pay systems;•logistics and regulations associated with shipping blood samples, including infrastructure conditions and transportation delays;•limits on our ability to penetrate international markets if our current products or assays and our planned future products or assays cannot be processedby an appropriately qualified local laboratory;•financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable and exposure to foreign currencyexchange rate fluctuations;•reduced protection for intellectual property rights, or lack of them in certain jurisdictions, forcing more reliance on our trade secrets, if available;•natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of tradeand other business restrictions; and•failure to comply with the Foreign Corrupt Practices Act, including its books and records provisions and its anti-bribery provisions, by maintainingaccurate information and control over sales activities and distributors’ activities.Any of these risks, if encountered, could significantly harm our future international expansion and operations and consequently, have a material adverseeffect on our financial condition, results of operations and cash flows.General economic or business conditions may have a negative impact on our business.Continuing concerns over United States health care reform legislation and energy costs, geopolitical issues, the availability and cost of credit andgovernment stimulus programs in the United States and other countries have contributed to increased volatility and diminished expectations for the globaleconomy. These factors, combined with low business and consumer confidence and high unemployment, precipitated an economic slowdown and recession.If the economic climate deteriorates, our business, including our access to patient samples and the addressable market for products or diagnostic assays thatwe may successfully develop, as well as the financial condition of our suppliers and our third-party payers, could be adversely affected, resulting in anegative impact on our business, financial condition and results of operations.43Intrusions into our computer systems could result in compromise of confidential information.Despite the implementation of security measures, our technology or systems that we interface with, including the Internet and related systems, may bevulnerable to physical break-ins, hackers, improper employee or contractor access, computer viruses, programming errors, or similar problems. Any of thesemight result in confidential medical, business or other information of other persons or of ourselves being revealed to unauthorized persons.There are a number of state, federal and international laws protecting the privacy and security of health information and personal data. The HealthInformation Technology for Economic and Clinical Health Act of 2009, or HITECH, amended the privacy and security provisions of the Health InsurancePortability and Accountability Act, or HIPAA. HIPAA imposes limitations on the use and disclosure of an individual’s healthcare information by certainhealthcare providers, healthcare clearinghouses, and health insurance plans, collectively referred to as covered entities, and also grants individuals rightswith respect to their health information. HIPAA also imposes compliance obligations and corresponding penalties for non-compliance on individuals andentities that provide services to healthcare providers and other covered entities, collectively referred to as business associates. HITECH also made significantincreases in the penalties for improper use or disclosure of an individual’s health information under HIPAA and extended enforcement authority to stateattorneys general. As amended by HITECH and subsequently by the final omnibus rule adopted in 2013, or Final Omnibus Rule, HIPAA also imposesnotification requirements on covered entities in the event that certain health information has been inappropriately accessed or disclosed: notificationrequirements to individuals, federal regulators, and in some cases, notification to local and national media. Notification is not required under HIPAA if thehealth information that is improperly used or disclosed is deemed secured in accordance with encryption or other standards developed by the U.S.Department of Health and Human Services, or HHS. Most states have laws requiring notification of affected individuals and/or state regulators in the event ofa breach of personal information, which is a broader class of information than the health information protected by HIPAA. Many state laws impose significantdata security requirements, such as encryption or mandatory contractual terms to ensure ongoing protection of personal information. Activities outside of theUnited States implicate local and national data protection standards, impose additional compliance requirements and generate additional risks ofenforcement for non-compliance. For example, if we obtain certain personal information regarding residents in the European Union, we may be subject to theEuropean Union General Data Protection Regulation. We may be required to expend significant capital and other resources to ensure ongoing compliancewith applicable privacy and data security laws, to protect against security breaches and hackers or to alleviate problems caused by such breaches.We depend on our information technology and telecommunications systems, and any failure of these systems could harm our business.We depend on information technology and telecommunications systems for significant aspects of our operations. In addition, our third-party billing softwareprovider depends upon telecommunications and data systems provided by outside vendors and information we provide on a regular basis. These informationtechnology and telecommunications systems support a variety of functions, including assay processing, sample tracking, quality control, customer serviceand support, billing and reimbursement, research and development activities and our general and administrative activities. Information technology andtelecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human actsand natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronicbreak-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that couldaffect our information technology and telecommunications systems, failures or significant downtime of our information technology or telecommunicationssystems or those used by our third-party service providers could prevent us from processing assays, providing assay results to medical oncologists, surgicaloncologists, urologists, pulmonologists, pathologists, other physicians, billing payers, processing reimbursement appeals, handling patient or physicianinquiries, conducting research and development activities and managing the administrative aspects of our business. Any disruption or loss of informationtechnology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our business.44Regulatory Risks Relating to Our BusinessHealthcare policy changes, including recently enacted legislation reforming the U.S. health care system, may have a material adverse effect on ourfinancial condition, results of operations and cash flows.The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively the ACA, enacted inMarch 2010, makes a number of substantial changes in the way health care is financed by both governmental and private insurers. Among other things, theACA requires each certain medical device manufacturer to pay an excise tax equal to 2.3%, or Medical Device Excise Tax, of the price for which suchmanufacturer sells its medical devices that are listed with the FDA. We believe that at this time this tax does not apply to our current diagnostic assays or toour products that are currently sold or in development; nevertheless, this could change in the future if either the FDA or the Internal Revenue Service, whichregulates the payment of this excise tax, changes its position.Although some of these provisions may negatively impact payment rates for clinical laboratory tests, the ACA also extends coverage to over 30 millionpreviously uninsured people, which may result in an increase in the demand for our current assays and our planned future assays. Since January 2017, thePresident of the United States has signed two executive orders and other directives designed to delay, circumvent, or loosen certain requirements mandatedby the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passedrepeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing penalties starting January 1, 2019, for not complying withthe ACA’s individual mandate to carry health insurance and delaying the implementation of certain ACA-mandated fees, including but not limited theMedical Device Excise Tax. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the“individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. While the Texas U.S. District Court Judge, as well as the Trumpadministration and CMS, have stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequentappeals, and other efforts to repeal and replace the ACA will impact the ACA.In addition, other legislative changes have been proposed and adopted since the ACA was enacted. The Protecting Access to Medicare Act of 2014, orPAMA, was signed to law, which, among other things, significantly alters the current payment methodology under the CLFS. Under the new law, issued in2016 and the reporting period beginning in 2017 and every three years thereafter (or annually in the case of advanced diagnostic laboratory tests), clinicallaboratories must report laboratory test payment data for each Medicare-covered clinical diagnostic laboratory test that it furnishes during a time period. Thereported data must include the payment rate (reflecting all discounts, rebates, coupons and other price concessions) and the volume of each test that was paidby each private payer (including health insurance issuers, group health plans, Medicare Advantage plans and Medicaid managed care organizations).Beginning in 2018, the Medicare payment rate for each clinical diagnostic laboratory test is equal to the weighted median amount for the test from the mostrecent data collection period. The payment rate will apply to laboratory tests furnished by a hospital laboratory if the test is separately paid under the hospitaloutpatient prospective payment system. The PAMA rate changes to our tests that were impacted did not materially affect our payments beginning in 2018;however, we cannot predict how this may change future payment in coming years. Also, under PAMA, the Centers for Medicare & Medicaid Services, orCMS, is required to adopt temporary billing codes to identify new tests and new advanced diagnostic laboratory tests that have been cleared or approved bythe FDA. For an existing test that is cleared or approved by the FDA and for which Medicare payment is made as of April 1, 2014, CMS is required to assign aunique billing code if one has not already been assigned by the agency. In addition to assigning the code, CMS was required to publicly report payment forthe tests no later than January 1, 2016. Further, under PAMA, CMS is required to adopt temporary billing codes to identify new tests and new advanceddiagnostic laboratory tests that have been cleared or approved by the FDA. We cannot determine at this time the full impact of PAMA on our business,financial condition and results of operations.Additionally, the Budget Control Act of 2011, among other things, created the Joint Select Committee on Deficit Reduction to recommend proposals inspending reductions to Congress. The Joint Select Committee did not achieve its targeted deficit reduction of at least $1.2 trillion for the years 2013 through2021, triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments toproviders and suppliers of up to 2% per fiscal year, starting in 2013, and, due to subsequent legislative amendments to the statute, will remain in effectthrough 2027 unless additional congressional action is taken. The full impact on our business the sequester law is uncertain. In addition, the Middle-ClassTax Relief and Job Creation Act of 2012, or MCTRJCA, mandated an additional change in Medicare reimbursement for clinical laboratory tests.45Some of our laboratory assay business is subject to the Medicare Physician Fee Schedule and, under the current statutory formula, the rates for these servicesare updated annually. For the past several years, the application of the statutory formula would have resulted in substantial payment reductions if Congressfailed to intervene. In the past, Congress passed interim legislation to prevent the decreases. If Congress fails to intervene to prevent the negative updatefactor in future years, the resulting decrease in payment may adversely affect our revenue and results of operations. If in future years Congress does not adoptinterim legislation to block or offset, and/or CMS does not moderate, any substantial CMS-proposed reimbursement reductions, the resulting decrease inpayments from Medicare could adversely impact our revenues and results of operations.We cannot predict whether future health care initiatives will be implemented at the federal or state level, or how any future legislation or regulation mayaffect us. The expansion of government’s role in the U.S. health care industry, and changes to the reimbursement amounts paid by Medicare and other payersfor our current assays and our planned future assays, may reduce our profits, if any, and have a materially adverse effect on our business, financial condition,results of operations and cash flows. Moreover, Congress has proposed on several occasions to impose a 20% coinsurance payment requirement on patientsfor clinical laboratory tests reimbursed under the Medicare Clinical Laboratory Fee Schedule, which would require us to bill patients for these amounts. In theevent that Congress were to ever enact such legislation, the cost of billing and collecting for our assays could often exceed the amount actually received fromthe patient.Our commercial success could be compromised if hospitals or other clients do not pay our invoices or if third-party payers, including managed careorganizations and Medicare, do not provide coverage and reimbursement, breach, rescind or modify their contracts or reimbursement policies or delaypayments for our current assays and our planned future assays.Medical oncologists, surgical oncologists, urologists, pulmonologists, pathologists and other physicians may not order our current assays and our plannedfuture assays unless third-party payers, such as managed care organizations and government payers (e.g., Medicare and Medicaid), pay a substantial portionof the assay price. Coverage and reimbursement by a third-party payer may depend on a number of factors, including a payer’s determination that assaysusing our technologies are:•not experimental or investigational;•medically necessary;•appropriate for the specific patient;•cost-effective;•supported by peer-reviewed publications; and•included in clinical practice guidelines.Uncertainty surrounds third-party payer coverage and adequate reimbursement of any test incorporating new technology, including tests developed using ourtechnologies. Technology assessments of new medical tests conducted by research centers and other entities may be disseminated to interested parties forinformational purposes. Third-party payers and health care providers may use such technology assessments as grounds to deny coverage for a test orprocedure. Technology assessments can include evaluation of clinical utility studies, which define how a test is used in a particular clinical setting orsituation.Because each payer generally determines for its own enrollees or insured patients whether to cover or otherwise establish a policy to reimburse our diagnosticassays, seeking payer approvals is a time-consuming and costly process. We cannot be certain that coverage for our current assays and our planned futureassays will be provided in the future by additional third-party payers or that existing agreements, policy decisions or reimbursement levels will remain inplace or be fulfilled under existing terms and provisions. If we cannot obtain coverage and adequate reimbursement from private and governmental payerssuch as Medicare and Medicaid for our current assays, or new assays or assay enhancements that we may develop in the future, our ability to generaterevenues could be limited, which may have a material adverse effect on our financial condition, results of operations and cash flow. Further, we mayexperience delays and interruptions in the receipt of payments from third-party payers due to missing documentation and/or other issues, which could causedelay in collecting our revenue.46In addition, to the extent that our assays are ordered for Medicare inpatients and outpatients, only the hospital may receive payment from the Medicareprogram for the technical component of pathology services and any clinical laboratory services that we perform, unless the testing is ordered at least 14 daysafter discharge and certain other requirements are met. We therefore must look to the hospital for payment for these services under these circumstances. Ifhospitals refuse to pay for the services or fail to pay in a timely manner, our ability to generate revenues could be limited, which may have a material adverseeffect on our financial condition, results of operations and cash flow.We expect to depend on Medicare and a limited number of private payers for a significant portion of our revenues and if these or other payers stopproviding reimbursement or decrease the amount of reimbursement for our current assays and our planned future assays, our revenues could decline.Approximately 39% of total net revenues during the years ended December 31, 2017 and 2018, were associated with Medicare reimbursement.Approximately 19% and 11% of total net revenues during the years ended December 31, 2017 and 2018, respectively, were associated with Blue Cross BlueShield reimbursement, and approximately 12% and 17% of total net revenues for the years ended December 31, 2017 and 2018, respectively, were associatedwith United Healthcare reimbursement. We cannot assure you that, even if our current assays and our planned future assays are otherwise successful,reimbursement for the currently Medicare, Blue Cross Blue Shield, and United Healthcare covered-portions of our current assays and our planned futureassays would, without such contracted payer reimbursement for the capture/enumeration portion, produce sufficient revenues to enable us to reachprofitability and achieve our other commercial objectives.Medicare and other third-party payers may change their coverage policies or cancel future contracts with us at any time, review and adjust the rate ofreimbursement or stop paying for our assays altogether, which would reduce our total revenues. Payers have increased their efforts to control the cost,utilization and delivery of health care services. In the past, measures have been undertaken to reduce payment rates for and decrease utilization of clinicallaboratory testing generally. Because of the cost-trimming trends, third-party payers that currently cover and provide reimbursement for our current assaysand our planned future assays may suspend, revoke or discontinue coverage at any time, or may reduce the reimbursement rates payable to us. Any suchaction could have a negative impact on our revenues, which may have a material adverse effect on our financial condition, results of operations and cashflows.In addition, we are currently considered a “non-contracted provider” by many private payers because we have not entered into a specific contract to providediagnostic assays to their insured patients at specified rates of reimbursement. Additionally, a significant amount of our non-Medicare business (privatepayers) has historically not been contracted, and reimbursement for this business has historically not been at “in network” rates and has therefore beeninconsistent. We first began to contract private payer networks in 2015, and since then our number of accessions treated as “in network” has increased as wecontinue to execute additional contracts, and reimbursement is improving. We are currently contracted with nine preferred provider organization networks,three large health plans, and five regional independent physician associations, and expect to continue to gain contracts in order to be considered as an “in-network” provider with additional plans. If we were to become a contracted provider with additional payers in the future, the amount of overallreimbursement we receive would likely decrease because we could be reimbursed less money per assay performed at a contracted rate than at a non-contractedrate, which could have a negative impact on our revenues. Further, we typically are unable to collect payments from patients beyond that which is paid bytheir insurance and will continue to experience lost revenue as a result.Because of certain Medicare billing policies, we may not receive complete reimbursement for assays provided to Medicare patients. Medicarereimbursement revenues are an important component of our business model, and private payers sometimes look to Medicare determinations when makingtheir own payment determinations; therefore, incomplete or inadequate reimbursement from Medicare would negatively affect our business.Medicare has coverage policies that can be national or regional in scope. Coverage means that assay is approved as a benefit for Medicare beneficiaries. Ifthere is no coverage, neither the supplier nor any other party, such as a reference laboratory, may receive reimbursement from Medicare for the service. Thereis currently no national coverage policy regarding the CTC enumeration portion of our assays. Because our laboratory is in California, the regional MedicareAdministrative Contractor, or MAC, for California is the relevant MAC for all our assays. The previous MAC for California, Palmetto, which is contractedwith CMS to administer the Molecular Diagnostic Services, or MolDx, program that sets guidelines for coding, coverage and reimbursement of moleculardiagnostic assays, adopted a negative coverage policy for CTC enumeration. The current MAC for California, Noridian Healthcare Solutions, LLC, isadopting the coverage policies from Palmetto. Therefore, the enumeration portion of our assays is not currently covered, and we will receive no payment fromMedicare for47this portion of the service unless and until the coverage policy is changed. Although approximately 76% and 76% of all billable cases received during theyears ended December 31, 2017 and 2018, respectively, relate to our Target-Selector biomarker assays, we continue to receive orders for traditionalenumeration testing, which counts disease burden, and therefore the enumeration testing receives no payment from Medicare based upon the existingcoverage decision. The CTC enumeration counts disease burden and is a prognostic assay, and although valuable, it does not meet many of the medicalnecessity requirements of Medicare and the payers. We intend to pursue payment for the capture portion of our CTC technology that allows us to run ourdiagnostic testing for some of our Target-Selector assays.We cannot assure you that, even if our current assays and our planned future assays are otherwise successful, reimbursement for the currently Medicare, BlueCross Blue Shield, and United Healthcare-covered portions of our current assays and our planned future assays would, without such contracted payerreimbursement for the capture/enumeration portion, produce sufficient revenues to enable us to reach profitability and achieve our other commercialobjectives.The processing of Medicare claims is subject to change at CMS’ discretion at any time. Cost containment initiatives may be a threat to Medicarereimbursement levels (including for the covered components of our current assays and our planned future assays, including FISH analysis and molecularassays) for the foreseeable future.Long payment cycles of Medicare, Medicaid and/or other third-party payers, or other payment delays, could hurt our cash flows and increase our need forworking capital.Medicare and Medicaid have complex billing and documentation requirements that we must satisfy in order to receive payment, and the programs can beexpected to carefully audit and monitor our compliance with these requirements. We must also comply with numerous other laws applicable to billing andpayment for healthcare services, including, for example, privacy laws. Failure to comply with these requirements may result in, among other things, non-payment, refunds, exclusion from government healthcare programs, and civil or criminal liabilities, any of which may have a material adverse effect on ourrevenues and earnings. In addition, failure by third-party payers to properly process our payment claims in a timely manner could delay our receipt ofpayment for our products and services, which may have a material adverse effect on our cash flows.Complying with numerous regulations pertaining to our business is an expensive and time-consuming process, and any failure to comply could result insubstantial penalties.We are subject to CLIA, a federal law regulating clinical laboratories that perform testing on specimens derived from humans for the purpose of providinginformation for the diagnosis, prevention or treatment of disease. Our clinical laboratory must be certified under CLIA in order for us to perform testing onhuman specimens. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific standards in theareas of personnel qualifications, administration, and participation in proficiency testing, patient test management, quality control, quality assurance andinspections. We have a current certificate of accreditation under CLIA to perform high complexity testing, and our laboratory is accredited by the College ofAmerican Pathologists, or CAP, one of six CLIA-approved accreditation organizations. To renew this certificate, we are subject to survey and inspectionevery two years. Moreover, CLIA and CAP inspectors may make periodic inspections of our clinical laboratory outside of the renewal process. The failure tocomply with CLIA or CAP requirements can result in enforcement actions, including the revocation, suspension, or limitation of our CLIA and/or CAPcertificate of accreditation, as well as a directed plan of correction, state on-site monitoring, civil money penalties, civil injunctive suit and/or criminalpenalties. We must maintain CLIA compliance and certification to be eligible to bill for assays provided to Medicare beneficiaries. If we were to be found outof compliance with CLIA program requirements and subjected to sanctions, our business and reputation could be harmed. Even if it were possible for us tobring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so.In addition, our laboratory is located in California and is required by state law to have a California state license; as we expand our geographic focus, we mayneed to obtain laboratory licenses from additional states. California laws establish standards for operation of our clinical laboratory, including the trainingand skills required of personnel and quality control. In addition, we hold licenses from the states of Pennsylvania, Maryland and Rhode Island to testspecimens from patients in those states or received from ordering physicians in those states. In addition, our clinical reference laboratory is required to belicensed on a product-specific basis by New York as an out of state laboratory and our products, as LDTs, must be approved by the New York StateDepartment of Health before they are offered in New York. As part of this process, the State of New York requires validation of our assays. We currently do nothave the necessary New York license, but we are in the process of48addressing the requirements for licensure in New York. Other states may have similar requirements or may adopt similar requirements in the future. Finally,we may be subject to regulation in foreign jurisdictions if we seek to expand international distribution of our assays outside the United States.If we were to lose our CLIA certification or California laboratory license, whether as a result of a revocation, suspension or limitation, we would no longer beable to offer our assays, which would limit our revenues and harm our business. If we were to lose, or fail to obtain, a license in any other state where we arerequired to hold a license, we would not be able to test specimens from those states. If we were to lose our CAP accreditation, our reputation for quality, aswell as our business, financial condition and results of operations, could be significantly and adversely affected.If the FDA were to begin requiring approval or clearance of our current products or assays and our planned future products or assays, we could incursubstantial costs and time delays associated with meeting requirements for pre-market clearance or approval or we could experience decreased demandfor, or reimbursement of, our assays.We provide our assays as LDTs. Historically; the FDA has exercised enforcement discretion with respect to most LDTs and has not required laboratories thatoffer LDTs to comply with the agency’s requirements for medical devices (e.g., establishment registration, device listing, quality systems regulations,premarket clearance or premarket approval, and post-market controls). In recent years, however, the FDA has stated it intends to end its policy of enforcementdiscretion and regulate certain LDTs as medical devices. To this end, on October 3, 2014, the FDA issued two draft guidance documents, entitled “Frameworkfor Regulatory Oversight of Laboratory Developed Tests (LDTs)” and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests(LDTs)”, respectively, that set forth a proposed risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. The FDA hasindicated that it does not intend to modify its policy of enforcement discretion until the draft guidance documents are finalized. In January 2017, the FDAannounced that final guidance on the oversight of LDTs would allow for further public discussion. On January 13, 2017 the FDA issued a “Discussion Paperon Laboratory Developed Tests (LDTs),” which states that the material in the document does not represent a final version of the LDT draft guidancedocuments that were published in 2014 or position of the FDA; rather, the document is a method to encourage additional dialogue. The timing of when, if atall, the draft guidance documents will be finalized is unclear, and even then, the new regulatory requirements are proposed to be phased-in consistent withthe schedule set forth in the guidance. Nevertheless, the FDA may decide to regulate certain LDTs on a case-by-case basis at any time. LDTs with the sameintended use as a cleared or approved companion diagnostic are defined in FDA’s draft guidance as “high-risk LDTs (Class III medical devices)” for whichpremarket review would be first to occur.FDA review, if required and successfully accomplished, would be expected to have some advantages. Certain health insurance payers have paid higheramounts over LDT prices for FDA approved or cleared tests, recognizing the additional costs of bringing a test through regulatory review. Some payers alsoaccept FDA approval or clearance as a presumptive evidence of an assay’s analytic validity and clinical validity, which can reduce the barriers to coveragesince the payer can focus its review on clinical utility.The container we provide for collection and transport of blood samples from a health care provider to our clinical laboratory, as well as our BCTs, may bemedical devices subject to the FDA regulation but are currently exempt from pre-market review by the FDA. While we believe that we are currently inmaterial compliance with applicable laws and regulations, we cannot assure you that the FDA or other regulatory agencies would agree with ourdetermination, and a determination that we have violated these laws, or a public announcement that we are being investigated for possible violations of theselaws, could adversely affect our business, prospects, results of operations or financial condition.Some of the materials we use for our current products, assays and services and may use in our planned future products, assays and services are labeled forRUO. In November 2013, the FDA finalized guidance regarding the sale and use of products labeled for research or investigational use only. Among otherthings, the guidance advises that the FDA continues to be concerned about distribution of research or investigational use only products intended for clinicaldiagnostic 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 thedistribution of the product in question. The FDA has advised that if evidence demonstrates that a product is inappropriately labeled for research orinvestigational use only, the device would be misbranded and adulterated within the meaning of the Federal Food, Drug and Cosmetic Act. Some of thematerials and reagents obtained by us from suppliers for use in our current products, assays and services and our planned future products, assays and servicesare currently labeled as research or investigational use only products. If the FDA were to undertake49enforcement actions, some of our suppliers might cease selling research or investigational use products to us, and any failure to obtain an acceptablesubstitute could significantly and adversely affect our business, financial condition and results of operations, including increasing the cost of materials orreagents used in our current products, assays and services or planned future products, assays and services or delaying, limiting or prohibiting the purchase ofmaterials or reagents necessary to sell our current products or planned future products or to perform our current assays or our planned future assays.Our BCTs and Target Selector kits are marketed for RUO and distributed and sold to end users, some of which will be researchers and institutions while otherend users could be labs performing clinical testing that will create their own LDTs. Some end users may assert that our ROU products caused their assays toperform inadequately or give erroneous results. If that was the case, we could potentially incur additional liabilities.Further, HHS requested that its Advisory Committee on Genetics, Health and Society make recommendations about the oversight of genetic testing. A finalreport was published in April 2008. If the report’s recommendations for increased oversight of genetic testing were to result in further regulatory burdens,they could negatively affect our business and delay the commercialization of assays in development.Additionally, on March 16, 2018 CMS issued a final determination decision memo for Next-Generation Sequencing, or NGS, tests for Medicare Beneficiarieswith Advanced Cancer (CAG-00450N). Under this final determination, NGS tests that gain FDA approval or clearance as a companion diagnostic will receivecoverage, and the final determination of coverage for NGS tests that are LDTs will be left up to the local MAC. Currently, only 1 of our 15 CLIA validatedassays is NGS-based; however, we plan to offer additional NGS assays in the future. To gain coverage for those assays, we will need to apply to Palmetto,which is the MAC that evaluates and recommends payment coverage or denial for molecular testing in our jurisdiction. Historically, Palmetto has offered apath to reimbursement by providing coverage while data is being gathered known as Coverage with Data Development, or CDD. Going forward, the extent towhich CDD will be continued, if at all, or to the extent that a process will be available in its place, if any, are unclear. The requirement of pre-market review could negatively affect our business until such review is completed and clearance to market or approval is obtained.The FDA could require that we stop selling our products or diagnostic assays pending pre-market clearance or approval. If the FDA allows our products orassays to remain on the market but there is uncertainty about our products or assays, if they are labeled investigational by the FDA or if labeling claims theFDA allows us to make are very limited, orders from laboratory supply distributors and physicians, or reimbursement from third-party payers, may decline.The regulatory approval process may involve, among other things, successfully completing additional clinical trials and making a 510(k) submission orfiling a pre-market approval application with the FDA. If the FDA requires pre-market review, our products or assays may not be cleared or approved on atimely basis, if at all. We may also decide voluntarily to pursue FDA pre-market review of our products or assays if we determine that doing so would beappropriate.If we were required to conduct additional clinical studies or trials before continuing to offer assays that we have developed or may develop as LDTs, thosestudies or trials could lead to delays or failure to obtain necessary regulatory approval, which could cause significant delays in commercializing anyfuture products and harm our ability to achieve sustained profitability.If the FDA decides to require that we obtain clearance or approvals to commercialize our current assays or our planned future assays, we may be required toconduct additional pre-market clinical testing before submitting a regulatory notification or application for commercial sales. In addition, as part of our long-term strategy we may plan to seek FDA clearance or approval, so we can sell our assays outside our CLIA laboratory; however, we would need to conductadditional clinical validation activities on our assays before we can submit an application for FDA approval or clearance. Clinical trials must be conducted incompliance with FDA regulations or the FDA may take enforcement action or reject the data. The data collected from these clinical trials may ultimately beused to support market clearance or approval for our assays. It may take two years or more to conduct the clinical studies and trials necessary to obtainapproval from the FDA to commercially launch our current assays and our planned future assays outside of our clinical laboratory. Even if our clinical trialsare completed as planned, we cannot be certain that their results will support our assay claims or that the FDA or foreign authorities will agree with ourconclusions regarding our assay results. Success in early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure thatthe later trials will replicate the results of prior clinical trials and studies. If we are required to conduct pre-market clinical trials, whether using prospectivelyacquired samples or archival samples, delays in the commencement or completion of clinical testing could significantly increase our assay development costsand delay commercialization. Many of the factors that may cause or lead to a delay in the commencement or completion of clinical50trials may also ultimately lead to delay or denial of regulatory clearance or approval. The commencement of clinical trials may be delayed due to insufficientpatient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients toclinical sites and the eligibility criteria for the clinical trial. Moreover, the clinical trial process may fail to demonstrate that our current assays and ourplanned future assays are effective for the proposed indicated uses, which could cause us to abandon an assay candidate and may delay development of otherassays.We may find it necessary to engage contract research organizations to perform data collection and analysis and other aspects of our clinical trials, whichmight increase the cost and complexity of our trials. We may also depend on clinical investigators, medical institutions and contract research organizationsto perform the trials properly. If these parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality,completeness or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinicaltrials may have to be extended, delayed or terminated. Many of these factors would be beyond our control. We may not be able to enter into replacementarrangements without undue delays or considerable expenditures. If there are delays in testing or approvals as a result of the failure to perform by thirdparties, our research and development costs would increase, and we may not be able to obtain regulatory clearance or approval for our current assays and ourplanned future assays. In addition, we may not be able to establish or maintain relationships with these parties on favorable terms, if at all. Each of theseoutcomes would harm our ability to market our assays or to achieve sustained profitability.We are subject to federal and state healthcare fraud and abuse laws and regulations and could face substantial penalties if we are unable to fully complywith such laws.We are subject to health care fraud and abuse regulation and enforcement by both the federal government and the states in which we conduct our business.These health care laws and regulations include, for example:•the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providingremuneration, directly or indirectly, overtly or covertly, in cash or in kind, in return for or to induce either the referral of an individual for, or thepurchase, lease, order or recommendation of, any good, facility, item or services for which payment may be made under a federal health care programsuch as the Medicare and Medicaid programs;•the federal physician self-referral prohibition, commonly known as the Stark Law, which prohibits physicians from referring Medicare or Medicaidpatients to providers of “designated health services” with whom the physician or a member of the physician’s immediate family has an ownershipinterest or compensation arrangement, unless a statutory or regulatory exception applies;•HIPAA, which established additional federal civil and criminal liability for, among other things, knowingly and willfully executing a scheme todefraud any health care benefit program or making false statements in connection with the delivery of or payment for health care benefits, items orservices;•HIPAA, as amended by HITECH, and its implementing regulations, which imposes certain requirements relating to the privacy, security andtransmission of individually identifiable health information;•federal false claims and civil monetary penalties laws, which, prohibit, among other things, individuals or entities from knowingly presenting, orcausing to be presented, false or fraudulent claims for payment to the federal government;•the federal Physician Payments Sunshine Act requirements under the ACA, which require certain manufacturers of drugs, devices, biologics andmedical supplies to report to CMS information related to payments and other transfers of value made to or at the request of covered recipients, such asphysicians and teaching hospitals, and certain physician ownership and investment interests held by physicians and their immediate family members;and•state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to items or services reimbursedby any third-party payer, including commercial insurers.Further, the ACA, among other things, amends the intent requirement of the federal Anti-Kickback Statute and certain criminal health care fraud statutes.Where the intent requirement has been lowered, a person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it inorder to have committed a violation. In addition, the government may now assert that a claim including items or services resulting from a violation of thefederal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the false claims statutes. Any action brought against us for51violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert ourmanagement’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 besubject to any applicable penalty associated with the violation, including, among others, significant administrative, civil and criminal penalties, damagesand fines, imprisonment, integrity oversight and reporting obligations, and exclusion from participation in government funded healthcare programs such asMedicare, Medicaid programs, including the California Medical Assistance Program (Medi-Cal-the California Medicaid program) or other state or federalhealth care programs. Additionally, we could be required to refund payments received by us, and we could be required to curtail or cease our operations. Anyof the foregoing consequences could seriously harm our business and our financial results.We are required to comply with laws governing the transmission, security and privacy of health information that require significant compliance costs, andany failure to comply with these laws could result in material criminal and civil penalties.Under the administrative simplification provisions of HIPAA, HHS has issued regulations which establish uniform standards governing the conduct of certainelectronic health care transactions and protecting the privacy and security of protected health information used or disclosed by health care providers andother covered entities.The privacy regulations regulate the use and disclosure of protected health information by covered entities engaging in certain electronic transactions or“standard transactions.” They also set forth certain rights that an individual has with respect to his or her protected health information maintained by acovered entity, including the right to access or amend certain records containing protected health information or to request restrictions on the use ordisclosure of protected health information. The HIPAA security regulations establish administrative, physical and technical standards for maintaining theconfidentiality, integrity and availability of protected health information in electronic form. These standards apply to covered entities and also to “businessassociates” or third parties providing services to covered entities involving the use or disclosure of protected health information. The HIPAA privacy andsecurity regulations establish a uniform federal “floor” and do not supersede state laws that are more stringent or provide individuals with greater rights withrespect to the privacy or security of, and access to, their records containing protected health information. As a result, we may be required to comply with bothHIPAA privacy regulations and varying state privacy and security laws.Moreover, HITECH, among other things, established certain health information security breach notification requirements, which were later further modifiedby the Final Omnibus Rule. In the event of a breach of unsecured protected health information, a covered entity must notify each individual whose protectedhealth information is breached, federal regulators and in some cases, must publicize the breach in local or national media. Breaches affecting 500 individualsor more may be publicized by federal regulators who publicly identify the breaching entity, the circumstances of the breach and the number of individualsaffected.These laws contain significant fines and other penalties for wrongful use or disclosure of protected health information. Given the complexity of HIPAA andHITECH and their overlap with state privacy and security laws, and the fact that these laws are rapidly evolving and are subject to changing and potentiallyconflicting interpretation, our ability to comply with the HIPAA, HITECH and state privacy requirements is uncertain and the costs of compliance aresignificant. Adding to the complexity is that our operations are evolving, and the requirements of these laws will apply differently depending on such thingsas whether or not we bill electronically for our services. The costs of complying with any changes to the HIPAA, HITECH and state privacy restrictions mayhave a negative impact on our operations. Noncompliance could subject us to criminal penalties, civil sanctions and significant monetary penalties as well asreputational damage.Clinical research is heavily regulated and failure to comply with human subject protection regulations may disrupt our research program leading tosignificant expense, regulatory enforcement, private lawsuits and reputational damage.Clinical research is subject to federal, state and, for studies conducted outside of the United States, international regulation. At the federal level, the FDAimposes regulations for the protection of human subjects and requirements such as initial and ongoing institutional review board review; informed consentrequirements, adverse event reporting and other protections to minimize the risk and maximize the benefit to research participants. Many states imposehuman subject protection laws that mirror or in some cases exceed federal requirements. HIPAA also regulates the use and disclosure of protected healthinformation in connection with research activities. Research conducted overseas is subject to a variety of national protections such as mandatory ethicscommittee review, as well as laws regulating the use, disclosure and cross-border transfer of52personal data. For example, if we obtain certain personal information regarding residents in the European Union, we may be subject to the European UnionGeneral Data Protection Regulation. The costs of compliance with these laws may be significant and compliance with regulatory requirements may result indelay. Noncompliance may disrupt our research and result in data that is unacceptable to regulatory authorities, data lock or other sanctions that maysignificantly disrupt our operations.Violation of a state’s prohibition on the corporate practice of medicine could result in a material adverse effect on our business.A number of states, including California, do not allow business corporations to employ physicians to provide professional services. This prohibition againstthe “corporate practice of medicine” is aimed at preventing corporations such as us from exercising control over the medical judgments or decisions ofphysicians. The state licensure statutes and regulations and agency and court decisions that enumerate the specific corporate practice rules vary considerablyfrom state to state and are enforced by both the courts and regulatory authorities, each with broad discretion. If regulatory authorities or other parties in anyjurisdiction successfully assert that we are engaged in the unauthorized corporate practice of medicine, we could be required to restructure our contractualand other arrangements. In addition, violation of these laws may result in significant civil, criminal and administrative penalties imposed against us and/orthe professional through licensure proceedings, and exclusion from state and federal health care programs.Intellectual Property Risks Related to Our BusinessIf we are unable to obtain and maintain effective patent rights for our products or services, we may not be able to compete effectively in our markets.We rely upon a combination of patents, trade secret protection, and confidentiality agreements to protect the intellectual property related to our technologies,products and services. Our success depends in large part on our ability to obtain and maintain patent and other intellectual property protection in the UnitedStates and in other countries with respect to our proprietary technology and products.We have sought to protect our proprietary position by filing patent applications in the United States and abroad related to our novel technologies andproducts that are important to our business. This process is expensive and time consuming, and we may not be able to file and prosecute all necessary ordesirable patent applications at a reasonable cost or in a timely manner. The possibility exists that we will fail to identify patentable aspects of our researchand development output before it is too late to obtain patent protection.The patent position of diagnostic companies generally is highly uncertain and involves complex legal and factual questions for which legal principlesremain unsolved. The patent applications that we own, or in-license, may fail to result in issued patents with claims that cover our products or services in theUnited States or in other foreign countries. There is no assurance that all potentially relevant prior art relating to our patents and patent applications has beenfound, which can invalidate a patent or prevent a patent from issuing from a pending patent application. Even if patents do successfully issue, and even ifsuch patents cover our products and services, third parties may challenge their validity, enforceability, or scope, which may result in such patents beingnarrowed, found unenforceable or invalidated. Furthermore, even if they are unchallenged, our patents and patent applications may not adequately protectour intellectual property, provide exclusivity for our products and services, or prevent others from designing around our claims. Any of these outcomes couldimpair our ability to prevent competition from third parties, which may have an adverse impact on our business.We, independently or together with our licensors, have filed several patent applications covering various aspects of our products and services. We cannotoffer any assurances about which, if any, patents will issue, the breadth of any such patent or whether any issued patents will be found invalid andunenforceable or will be threatened by third parties. Any successful opposition to these patents or any other patents owned by or licensed to us after patentissuance could deprive us of rights necessary for the successful commercialization of any products and services that we may offer. Further, if we encounterdelays in regulatory approvals, the period of time during which we could market a product or service under patent protection could be reduced.53Patent policy and rule changes could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement ordefense of our issued patents.Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrowthe scope of our patent protection. The laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Publications ofdiscoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typicallynot published until 18 months after filing, or in some cases not at all. We therefore cannot be certain that we or our licensors were the first to make theinvention claimed in our owned and licensed patents or pending applications, or that we or our licensor were the first to file for patent protection of suchinventions. Assuming the other requirements for patentability are met, in the United States prior to March 15, 2013, the first to make the claimed invention isentitled to the patent, while outside the United States, the first to file a patent application is entitled to the patent. After March 15, 2013, under the Leahy-Smith America Invents Act, or the Leahy-Smith Act, enacted on September 16, 2011, the United States has moved to a first to file system. The Leahy-SmithAct also includes a number of significant changes that affect the way patent applications will be prosecuted and may also affect patent litigation. The effectsof these changes are currently unclear as the United States Patent and Trademark Office, or USPTO, must still implement various regulations, the courts haveyet to address any of these provisions and the applicability of the act and new regulations on specific patents discussed herein have not been determined andwould need to be reviewed. In general, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution ofour patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financialcondition.If we are unable to maintain effective proprietary rights for our products or services, we may not be able to compete effectively in our markets.In addition to the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that isnot patentable or that we elect not to patent, processes for which patents are difficult to enforce and any other elements of our products and services thatinvolve proprietary know-how, information or technology that is not covered by patents. However, trade secrets can be difficult to protect. We seek to protectour proprietary technology and processes, in part, by entering into confidentiality agreements with our employees, consultants, scientific advisors, andcontractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises andphysical and electronic security of our information technology systems. While we have confidence in these individuals, organizations and systems,agreements or security measures may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwisebecome known or be independently discovered by competitors.Although we expect all of our employees and consultants to assign their inventions to us, and all of our employees, consultants, advisors, and any thirdparties who have access to our proprietary know-how, information, or technology to enter into confidentiality agreements, we cannot provide any assurancesthat all such agreements have been duly executed or that our trade secrets and other confidential proprietary information will not be disclosed or thatcompetitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques.Misappropriation or unauthorized disclosure of our trade secrets could impair our competitive position and may have a material adverse effect on ourbusiness. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties formisappropriating the trade secret. Third-party claims of intellectual property infringement may prevent or delay our development and commercialization efforts.Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. There have been many lawsuitsand other proceedings involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patentinfringement lawsuits, interferences, oppositions, and reexamination proceedings before the USPTO and corresponding foreign patent offices. Numerous U.S.and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which we are developing products andservices. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our products and services may besubject to claims of infringement of the patent rights of third parties.54Third parties may assert that we are employing their proprietary technology without authorization. There may be third-party patents or patent applicationswith claims to materials, formulations, methods of manufacture, or methods for treatment related to the use or manufacture of our products and services. Wehave conducted freedom to operate analyses with respect to only certain of our products and services, and therefore we do not know whether there are anythird-party patents that would impair our ability to commercialize these products and services. We also cannot guarantee that any of our analyses arecomplete and thorough, nor can we be sure that we have identified each and every patent and pending application in the United States and abroad that isrelevant or necessary to the commercialization of our products and services. Because patent applications can take many years to issue, there may be currentlypending patent applications that may later result in issued patents that our products or services may infringe.For example, in August 2016, we received a letter from MolecularMD Corp. offering a license to two U.S. Patents owned by the Memorial Sloan-KetteringCancer Center, and licensed to MolecularMD Corp., that are relevant to one of the biomarkers we detect in our Liquid Biopsy Non-Small Cell Lung CancerProfile Target-Selector assay and our Liquid Biopsy Lung Cancer Resistance Profile Target-Selector™ assay. One of the two patents is expected to expire in2026. The other patent is expected to expire in 2028. Although we believe that the claims of both patents relevant to our assays would likely be held invalid,we cannot provide any assurances that a court or an administrative agency would agree with our assessment. If the validity of the relevant claims in questionis upheld upon a validity challenge, then we may be liable for past damages and would need a license in order to continue commercializing our LiquidBiopsy Non-Small Cell Lung Cancer Profile Target-Selector Assay and our Liquid Biopsy Lung Cancer Resistance Profile Target-Selector Assay in theUnited States. However, such a license may not be available on commercially reasonable terms or at all, which could materially and adversely affect ourbusiness.In addition, we are aware of a U.S. Patent owned by Amgen, Inc. that is relevant to one of the biomarkers we detect in our Liquid Biopsy Non-Small Cell LungCancer Profile Target-Selector assay and our Liquid Biopsy Lung Cancer Resistance Profile Target-Selector assay. The patent is expected to expire in 2028.Although we believe that the claims of the patent relevant to our assays would likely be held invalid, we cannot provide any assurances that a court or anadministrative agency would agree with our assessment. If the validity of the relevant claims in question is upheld upon a validity challenge, then we may beliable for past damages and would need a license in order to continue commercializing our Liquid Biopsy Non-Small Cell Lung Cancer Profile Target-Selector assay and our Liquid Biopsy Lung Cancer Resistance Profile Target-Selector assay in the United States. However, such a license may not beavailable on commercially reasonable terms or at all, which could materially and adversely affect our business.We are also aware of a U.S. Patent owned by Genentech, Inc. that is relevant to one of the biomarkers we detect in our Liquid Biopsy Lung Cancer ResistanceProfile Target-Selector assay and our Liquid Biopsy Colon Cancer Profile Target-Selector assay. The patent is expected to expire in 2025. Although webelieve that the claims of the patent relevant to our assays would likely be held invalid, we cannot provide any assurances that a court or an administrativeagency would agree with our assessment. If the validity of the relevant claims in question is upheld upon a validity challenge, then we may be liable for pastdamages and would need a license in order to continue commercializing our Liquid Biopsy Lung Cancer Resistance Profile Target-Selector assay and ourLiquid Biopsy Colon Cancer Profile Target-Selector assay in the United States. However, such a license may not be available on commercially reasonableterms or at all, which could materially and adversely affect our business.In addition, in July 2016, we received a communication from the Mayo Foundation for Medical Education and Research (“Mayo”) offering a license to a U.S.Patent owned by Mayo that is relevant to an antibody that we use in our Liquid Biopsy Immuno-Oncology PD-L1 assay. The patent is expected to expire in2021. At present, we believe that we will need a license to this patent to continue commercializing our Liquid Biopsy Immuno-Oncology PD-L1 assay. Weare currently in discussions with Mayo and believe a license can be obtained on commercially reasonable terms. However, if we are unable to secure such alicense, we may be liable for past damages, and our business could be materially and adversely affected.In addition, third parties may obtain patents in the future and claim that use of our technologies infringes upon these patents. If any third-party patents wereheld by a court of competent jurisdiction to cover aspects of our products or services, the holders of any such patents may be able to block our ability tocommercialize such products or services unless we obtained a license under the applicable patents, or until such patents expire or are finally determined to beinvalid or unenforceable. Such a license may not be available on commercially reasonable terms or at all.55Parties making claims against us may obtain injunctive or other equitable relief, which could effectively block our ability to further develop andcommercialize one or more of our products or services. Defense of these claims, regardless of their merit, would involve substantial litigation expense andwould be a substantial diversion of employee resources from our business. In the event of a successful claim of infringement against us, we may have to paysubstantial damages, including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign our infringing products or obtain one ormore licenses from third parties, which may be impossible or require substantial time and monetary expenditure.We may not be successful in obtaining or maintaining necessary rights to our products or services through acquisitions and in-licenses.We currently have rights to the intellectual property, through licenses from third parties and under patents that we own, to develop our products and services.Because our programs may require the use of proprietary rights held by third parties, the growth of our business will likely depend in part on our ability toacquire, in-license, or use these proprietary rights. We may be unable to acquire or in-license any compositions, methods of use, processes, or other third-partyintellectual property rights from third parties that we identify as necessary for our products or services. The licensing and acquisition of third-partyintellectual property rights is a competitive area, and a number of more established companies are also pursuing strategies to license or acquire third-partyintellectual property rights that we may consider attractive. These established companies may have a competitive advantage over us due to their size, cashresources, and greater clinical development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwillingto assign or license rights to us. We also may be unable to license or acquire third-party intellectual property rights on terms that would allow us to make anappropriate return on our investment.We sometimes collaborate with U.S. and foreign institutions to accelerate our research or development under written agreements with these institutions.Typically, these institutions provide us with an option to negotiate a license to any of the institution’s rights in technology resulting from the collaboration.Regardless of such option, we may be unable to negotiate a license within the specified timeframe or under terms that are acceptable to us. If we are unable todo so, the institution may offer the intellectual property rights to other parties, potentially blocking our ability to pursue our program.If we are unable to successfully obtain rights to required third-party intellectual property rights or maintain the existing intellectual property rights we have,we may have to abandon development of that program and our business and financial condition could suffer.Although we are not currently involved in any litigation, we may be involved in lawsuits to protect or enforce our patents or the patents of our licensors,which could be expensive, time consuming, and unsuccessful.Competitors may infringe our patents or the patents of our licensors. Although we are not currently involved in any litigation, if we or one of our licensingpartners were to initiate legal proceedings against a third-party to enforce a patent covering one of our products or services, the defendant could counterclaimthat the patent covering our product or service is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleginginvalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutoryrequirements, including lack of novelty, obviousness, or non-enablement. Grounds for an unenforceability assertion could be an allegation that someoneconnected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. The outcomefollowing legal assertions of invalidity and unenforceability is unpredictable.Interference proceedings provoked by third parties or brought by us or declared by the USPTO may be necessary to determine the priority of inventions withrespect to our patents or patent applications or those of our licensors. An unfavorable outcome could require us to cease using the related technology or toattempt to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us a license on commerciallyreasonable terms. Our defense of litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distract ourmanagement and other employees. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raisesufficient capital to continue our research programs, license necessary technology from third parties, or enter into development partnerships that would helpcommercialize our products or services.56Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of ourconfidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results ofhearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have amaterial adverse effect on the price of our common stock.We may be subject to claims that our employees, consultants, or independent contractors have wrongfully used or disclosed confidential information ofthird parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.We employ certain individuals who were previously employed at universities or other biotechnology or pharmaceutical companies, including ourcompetitors or potential competitors. Although we try to ensure that our employees, consultants, and independent contractors do not use the proprietaryinformation or know-how of others in their work for us, and we are not currently subject to any claims that our employees, consultants, or independentcontractors have wrongfully used or disclosed confidential information of third parties, we may in the future be subject to such claims. Litigation may benecessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectualproperty rights or personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result insubstantial costs and be a distraction to management and other employees.We may be subject to claims challenging the inventorship of our patents and other intellectual property.Although we are not currently experiencing any claims challenging the inventorship of our patents or ownership of our intellectual property, we may in thefuture be subject to claims that former employees, collaborators or other third parties have an interest in our patents or other intellectual property as aninventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of consultants or others who are involved indeveloping our products or services. Litigation may be necessary to defend against these and other claims challenging inventorship. If we fail in defendingany such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use,valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against suchclaims, litigation could result in substantial costs and be a distraction to management and other employees.Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents. Obtaining andenforcing patents in the biotechnology industry involves both technological and legal complexity. Therefore, obtaining and enforcing biotechnologypatents is costly, time consuming, and inherently uncertain. In addition, the United States has recently enacted and is currently implementing wide-rangingpatent reform legislation. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakenedthe rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, thiscombination of events has created uncertainty with respect to the value of patents, once obtained. Depending on future actions by the U.S. Congress, thefederal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain newpatents or to enforce our existing patents and patents that we might obtain in the future.We may not be able to protect our intellectual property rights throughout the world.Filing, prosecuting, and defending patents on products and services in all countries throughout the world would be prohibitively expensive, and ourintellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of someforeign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not beable to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using ourinventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patentprotection to develop their own products and may also export infringing products to territories57where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patentsor other intellectual property rights may not be effective or sufficient to prevent them from competing.Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systemsof certain countries, particularly certain developing countries, do not favor the enforcement of patents, trade secrets, and other intellectual propertyprotection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patents or marketing ofcompeting products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in foreign jurisdictions, whether or notsuccessful, could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of beinginvalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may notprevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts toenforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property thatwe develop or license. Our collaborators may assert ownership or commercial rights to inventions we develop from our use of the biological materials which they provide to us,or otherwise arising from the collaboration.We collaborate with several institutions, physicians and researchers in scientific matters. We do not have written agreements with certain of suchcollaborators, or the written agreements we have do not cover intellectual property rights. Also, we rely on numerous third parties to provide us with bloodsamples and biological materials that we use to develop assays. If we cannot successfully negotiate sufficient ownership and commercial rights to anyinventions that result from our use of a third-party collaborator’s materials, or if disputes arise with respect to the intellectual property developed with the useof a collaborator’s samples, or data developed in a collaborator’s study, we may be limited in our ability to capitalize on the market potential of theseinventions or developments.Risks Relating to Our Common StockThe price of our common stock may be volatile.Before our initial public offering, there was no public market for our common stock. Market prices for securities of early-stage life sciences companies havehistorically been particularly volatile. The factors that may cause the market price of our common stock to fluctuate include, but are not limited to:•progress, or lack of progress, in performing, developing and commercializing our current assays and our planned future assays;•favorable or unfavorable decisions about our assays from government regulators, insurance companies or other third-party payers;•our ability to recruit and retain qualified research and development personnel;•changes in investors’ and securities analysts’ perception of the business risks and conditions of our business;•changes in our relationship with key collaborators;•changes in the market valuation or earnings of our competitors or companies viewed as similar to us;•changes in key personnel;•depth of the trading market in our common stock;•changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;•the granting or exercise of employee stock options or other equity awards;•realization of any of the risks described herein; and•general market and economic conditions.58In addition, the equity markets have experienced significant price and volume fluctuations that have affected the market prices for the securities of newlypublic companies for a number of reasons, including reasons that may be unrelated to our business or operating performance. These broad market fluctuationsmay result in a material decline in the market price of our common stock and you may not be able to sell your shares at prices you deem acceptable. In thepast, following periods of volatility in the equity markets, securities class action lawsuits have been instituted against public companies. Such litigation, ifinstituted against us, could result in substantial cost and the diversion of management attention.Our failure to meet the continued listing requirements of The Nasdaq Capital Market could result in a de-listing of our common stock.If we fail to satisfy the continued listing requirements of The Nasdaq Capital Market, such as the corporate governance requirements, the minimum closingbid price requirement, or the minimum stockholders’ equity requirement, Nasdaq may take steps to de-list our common stock. For example, in May 2016, wereceived a letter from Nasdaq indicating that we are not in compliance with the minimum stockholders’ equity requirement of Nasdaq Listing Rule 5550(b)(1), and in each of June 2016, November 2016, and January 2018, we received letters from Nasdaq indicating that we are not in compliance with theminimum bid price requirement of Nasdaq Listing Rule 5550(a)(2), which requires that companies listed on The Nasdaq Capital Market maintain a minimumclosing bid price of at least $1.00 per share. If we fail to regain and/or maintain compliance with these, or any other of the continued listing requirements ofThe Nasdaq Capital Market, Nasdaq may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of ourcommon stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a de-listing, we would takeactions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow ourcommon stock to become listed again, stabilize the market price or improve the liquidity of our common stock, or prevent future non-compliance withNasdaq’s listing requirements.If our shares become subject to the penny stock rules, it would become more difficult to trade our shares.The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securitieswith a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automatedquotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system.If we do not retain a listing on The Nasdaq Capital Market, and if the price of our common stock is less than $5.00, our common stock will be deemed apenny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver astandardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in apenny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investmentfor the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactionsinvolving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducingthe trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.Our quarterly operating results may fluctuate significantly.We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors,including:•the rate of adoption and/or continued use of our current assays and our planned future assays by healthcare practitioners;•variations in the level of expenses related to our development programs;•addition or reduction of resources for sales and marketing;•addition or termination of clinical utility studies;•any intellectual property infringement lawsuit in which we may become involved;•third-party payer coverage and reimbursement determinations affecting our assays; and•regulatory developments affecting our assays.59If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially.Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.If securities or industry analysts issue an adverse opinion regarding our stock or do not publish research or reports about our company, our stock priceand 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 ourcompetitors. We do not control these analysts or the content and opinions or financial models included in their reports. Securities analysts may elect not toprovide research coverage of our company, and such lack of research coverage may adversely affect the market price of our common stock. The price of ourcommon stock could also decline if one or more equity research analysts downgrade our common stock or if those analysts issue other unfavorablecommentary or cease publishing reports about us or our business. If one or more equity research analysts cease coverage of our company, we could losevisibility in the market, which in turn could cause our stock price to decline.Future sales of our common stock or other securities, or the perception that future sales may occur, may cause the market price of our common stock todecline, even if our business is doing well.Sales of substantial amounts of our common stock or other securities, or the perception that these sales may occur, could materially and adversely affect theprice of our common stock and could impair our ability to raise capital through the sale of additional equity securities. For example, in May 2018, the SECdeclared effective a shelf registration statement filed by us. This shelf registration statement allows us to issue any combination of our common stock,preferred stock, debt securities and warrants from time to time for an aggregate initial offering price of up to $50 million, subject to certain limitations for solong as our public float is less than $75 million. The specific terms of additional future offerings, if any, under this shelf registration statement would beestablished at the time of such offerings. Depending on a variety of factors, including market liquidity of our common stock, the sale of shares under this shelfregistration statement may cause the trading price of our common stock to decline. The sale of a substantial number of shares of our common stock under thisshelf registration statement, or anticipation of such sales, could cause the trading price of our common stock to decline or make it more difficult for us to sellequity or equity-related securities in the future at a time and at a price that we might otherwise desire.We had outstanding 18,817,076 shares of common stock as of March 25, 2019, of which no more than 31,415 are restricted securities that may be sold onlyin accordance with the resale restrictions under Rule 144 of the Securities Act. In addition, as of March 25, 2019, we had outstanding preferred stockconvertible into 523,107 shares of our common stock, options to purchase 193,981 shares of our common stock, 360 shares of common stock were issuableupon the settlement of outstanding restricted stock units, or RSUs, and 17,799,485 shares of our common stock were issuable upon the exercise ofoutstanding warrants. Shares issued upon the exercise of stock options or upon the settlement of outstanding RSUs generally will be eligible for sale in thepublic market, except that affiliates will continue to be subject to volume limitations and other requirements of Rule 144 under the Securities Act. Theissuance or sale of such shares could depress the market price of our common stock.In the future, we also may issue our securities if we need to raise additional capital. The number of new shares of our common stock issued in connection withraising additional capital could constitute a material portion of the then-outstanding shares of our common stock.If we are unable to favorably assess the effectiveness of our internal control over financial reporting, investors may lose confidence in our financialreporting and our stock price could be materially adversely affected.Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controlsand procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in theirimplementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404(a) of theSarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm conducted in connection with Section 404(b) of theSarbanes-Oxley Act after our public float is at least $75 million and we no longer qualify as an “emerging growth company,” may reveal deficiencies in ourinternal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to ourconsolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to loseconfidence in our reported financial information, which could have a negative effect on the trading price of our common stock.60We are required to disclose changes made in our internal control procedures on a quarterly basis and our management is required to assess the effectiveness ofthese controls annually. However, for as long as we are an “emerging growth company” under the recently enacted JOBS Act, our independent registeredpublic accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404. Anindependent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected materialweaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies willmake our common stock less attractive to investors.We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage ofexemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not beingrequired to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regardingexecutive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding nonbinding advisory votes onexecutive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an emerging growth companyuntil December 31, 2019, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700 million as of any June 30 before that time or if we have total annual gross revenue of $1.07 billion or more during any fiscal yearbefore that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billionin non-convertible debt during any three year period before that time, we would cease to be an emerging growth company immediately. Even after we nolonger qualify as an emerging growth company, we may still qualify as a “smaller reporting company” which would allow us to take advantage of many ofthe same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of theSarbanes-Oxley Act, as well as reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannotpredict if investors find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive asa result, there may be a less active trading market for our common stock and our stock price may be more volatile.Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply toprivate companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, are subjectto the same new or revised accounting standards as other public companies that are not emerging growth companies. As a result, changes in rules of U.S.generally accepted accounting principles or their interpretation, the adoption of new guidance or the application of existing guidance to changes in ourbusiness could significantly affect our financial position and results of operations.We have incurred and will continue to incur significant increased costs as a result of operating as a public company, and our management will be requiredto devote substantial time to new compliance initiatives.As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Dodd-Frank Wall Street Reformand Consumer Protection Act, or the Dodd-Frank Act, the listing requirements of The Nasdaq Stock Market and other applicable securities rules andregulations. Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, make someactivities more difficult, time-consuming or costly, and increase demand on our systems and resources. The Sarbanes-Oxley Act requires, among other things,that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve ourdisclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight maybe required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. Further,there are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act, enacted in 2010, that require the SEC toadopt additional rules and regulations in these areas such as “say on pay” and proxy access. Recent legislation permits smaller “emerging growth companies”to implement many of these requirements over a longer period. We intend to continue taking advantage of this new legislation but cannot guarantee that wewill not be required to implement these requirements sooner than budgeted or planned and thereby incur unexpected expenses. Stockholder activism, thecurrent political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations anddisclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currentlyanticipate.61In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies,increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject tovarying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance isprovided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated byongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and thisinvestment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generatingactivities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory orgoverning bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.Anti-takeover provisions of our certificate of incorporation, our bylaws and Delaware law could make an acquisition of us, which may be beneficial to ourstockholders, more difficult and may prevent attempts by our stockholders to replace or remove the current members of our board and management.Certain provisions of our amended certificate of incorporation and amended and restated bylaws could discourage, delay or prevent a merger, acquisition orother change of control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares.Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove members of our Board of Directors. (For example,Delaware law provides that if a corporation has a classified board of directors, stockholders cannot remove any director during his or her term without cause.)These provisions also could limit the price that investors might be willing to pay in the future for our common stock, thereby depressing the market price ofour common stock. Stockholders who wish to participate in these transactions may not have the opportunity to do so. These provisions, among other things:•classify our Board of Directors into three classes of equal (or roughly equal) size, with all directors serving for a three-year term and the directors ofonly one class being elected at each annual meeting of stockholders, so that the terms of the classes of directors are “staggered”;•allow the authorized number of directors to be changed only by resolution of our Board of Directors;•authorize our Board of Directors to issue, without stockholder approval, preferred stock, the rights of which will be determined at the discretion of theBoard of Directors and that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent anacquisition that our Board of Directors does not approve;•establish advance notice requirements for stockholder nominations to our Board of Directors or for stockholder proposals that can be acted on atstockholder meetings; and•limit who may call a stockholders meeting.In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, which may, unless certain criteria are met,prohibit large stockholders, in particular those owning 15% or more of the voting rights on our common stock, from merging or combining with us for aprescribed period of time.Because we do not expect to pay cash dividends for the foreseeable future, you must rely on appreciation of our common stock price for any return on yourinvestment. Even if we change that policy, we may be restricted from paying dividends on our common stock.We do not intend to pay cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be atthe discretion of our Board of Directors and will depend upon results of operations, financial performance, contractual restrictions, restrictions imposed byapplicable law and other factors our Board of Directors deems relevant. Accordingly, you will have to rely on capital appreciation, if any, to earn a return onyour investment in our common stock. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.62The recently passed comprehensive U.S. federal income tax reform bill could adversely affect our business and financial condition.On December 22, 2017, U.S. federal income tax legislation was signed into law (H.R. 1, “An Act to provide for reconciliation pursuant to titles II and V of theconcurrent resolution on the budget for fiscal year 2018”, informally titled the Tax Cuts and Jobs Act, or the Tax Act). The Tax Act, among other things,contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, repealof the alternative minimum tax for corporations, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain smallbusinesses), limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, onetime taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certainimportant exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying orrepealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the Tax Act isuncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform tothe Tax Act. The impact of the Tax Act on holders of our common stock is also uncertain and could be adverse. We urge our stockholders to consult withtheir legal and tax advisors with respect to this legislation and the potential tax consequences of investing in or holding our common stock.Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of accrued amounts.We are subject to taxation in numerous U.S. states and territories. As a result, our effective tax rate is derived from a combination of applicable tax rates in thevarious places that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of such places.Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including passage of the newly enacted federalincome tax law, the results of examinations and audits of our tax filings, our inability to secure or sustain acceptable agreements with tax authorities, changesin accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different fromprevious periods or our current expectations and may result in tax obligations in excess of amounts accrued in our financial statements.Our ability to use our estimated net operating loss carryforwards and certain other tax attributes may be limited.Our ability to utilize our estimated federal net operating loss, carryforwards and federal tax credits may be limited under Sections 382 and 383 of the Code.Under the newly enacted federal income tax law, federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but thedeductibility of such federal net operating losses is limited. It is uncertain if and to what extent various states will conform to the newly enacted federal taxlaw. In addition, the limitations apply if an “ownership change,” as defined by Section 382 of the Code, occurs. If we have experienced an ownership changeat any time since our formation, we may already be subject to limitations on our ability to utilize our existing net operating losses and other tax attributes tooffset taxable income. Future changes in our stock ownership (including in connection with future offerings, as well as other changes that may be outside ofour control), may trigger an ownership change and, consequently, limitations under Sections 382 and 383 of the Code. As a result, if we earn net taxableincome, our ability to use our estimated pre-change net operating loss carryforwards and other tax attributes to offset United States federal taxable incomemay be subject to limitations, which could potentially result in increased future tax liability to us. As of December 31, 2018, we had estimated federal andstate net operating loss carryforwards of approximately $13.6 million and $24.7 million, respectively, and estimated federal and California research anddevelopment credits of approximately $160,000 and $3,543,000, respectively, which could be limited if we have experienced or do experience any“ownership changes.” We have not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownershipchanges since our formation, due to the complexity and cost associated with such a study, and the fact that there may be additional ownership changes in thefuture, however, we believe ownership changes likely occurred in each year from 2015 through 2018. As a result, we have estimated that the use of our netoperating loss is limited and the amounts above represent the remaining net operating loss carryforwards and research and development credits we estimatecan be used in the future, which remain fully offset by a valuation allowance to reduce the net asset to zero.63We could be subject to securities class action litigation.In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk isespecially relevant for us because early-stage life sciences companies have experienced significant stock price volatility in recent years. If we face suchlitigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business. Item 1B. Unresolved Staff Comments.Not applicable. Item 2. Properties.We have a lease for approximately 48,000 square feet of space in San Diego, California for use as a clinical reference laboratory and corporate headquarters,including manufacturing and research laboratories. As of December 31, 2018, the average rent for the remaining lease period is approximately $120,000 permonth. This lease expires in July 2020. Item 3. Legal Proceedings.In the normal course of business, we may be involved in legal proceedings or threatened legal proceedings. We are not party to any legal proceedings oraware of any threatened legal proceedings which are expected to have a material adverse effect on our financial condition, results of operations or liquidity. Item 4. Mine Safety Disclosures.Not applicable. 64PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market InformationOur common stock is traded on The Nasdaq Capital Market under the symbol “BIOC.” Holders of RecordAs of March 25, 2019, there were 44 holders of record of our common stock. The actual number of common stockholders is greater than the number of recordholders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number ofholders of record also does not include stockholders whose shares may be held in trust by other entities.Dividend PolicyWe have never declared dividends on our equity securities, and currently do not plan to declare dividends on shares of our common stock in the foreseeablefuture. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. Subject to the foregoing, the payment of cashdividends in the future, if any, will be at the discretion of our Board of Directors and will depend upon such factors as earnings levels, capital requirements,our overall financial condition and any other factors deemed relevant by our Board of Directors. Additionally, any payment of a dividend would require theprior approval of our lender.Securities Authorized for Issuance under Equity Compensation PlansInformation about our equity compensation plans is incorporated herein by reference to Part III, Item 12 of this Annual Report. Item 6. Selected Financial Data.Not applicable.65Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.The following discussion of our financial condition and results of operations should be read together with our financial statements and related notesincluded elsewhere in the Annual Report. This discussion contains forward-looking statements based upon our current plans, estimates, beliefs andexpectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-lookingstatements as a result of various factors, including those set forth under the sections entitled “Risk Factors,” “Special Note Regarding Forward-LookingStatements” and elsewhere in this Annual Report.We are an early stage molecular oncology diagnostics company that develops and commercializes proprietary circulating tumor cell, or CTC, and circulatingtumor DNA, or ctDNA, assays utilizing a standard blood sample, or “liquid biopsy.” Our current and planned assays are intended to provide information toaid healthcare providers to identify specific oncogenic alterations that may qualify a subset of cancer patients for targeted therapy at diagnosis, progressionor for monitoring in order to identify specific resistance mechanisms. Sometimes traditional procedures, such as surgical tissue biopsies, result in tumor tissuethat is insufficient and/or unable to provide the molecular subtype information necessary for clinical decisions. Our assays, performed on blood, have thepotential to provide more contemporaneous information on the characteristics of a patient’s disease when compared with tissue biopsy and radiographicimaging.Our current assays and our planned future assays focus on key solid tumor indications utilizing our Target-SelectorTM liquid biopsy technology platform forthe biomarker analysis of CTCs and ctDNA from a standard blood sample. Our patented Target-Selector CTC offering is based on an internally developedmicrofluidics-based cell capture and analysis platform, with enabling features that change how information provided by CTC testing is used by clinicians.Our CTC technology could also be validated on cerebral spinal fluid in order to provide information for patients with central nervous system (CNS) tumorsboth primary and metastatic. Our patented Target-Selector ctDNA technology enables detection of mutations and genome alterations with enhancedsensitivity and specificity, and is applicable to nucleic acid from ctDNA, and could potentially be validated for other sample types such as bone marrow,pleural effusions, ascitic fluid, tissue (surgical resection and/or biopsies) or cerebrospinal fluid. Our Target-Selector CTC and ctDNA platforms provide bothbiomarker detection as well as monitoring capabilities and require only a patient blood sample. In January 2019, we began offering liquid biopsy kitscontaining our patented and proprietary Target Selector testing to laboratories and researchers worldwide.At our corporate headquarters facility located in San Diego, California, we operate a clinical laboratory that is certified under the Clinical LaboratoryImprovement Amendments of 1988, or CLIA, and accredited by the College of American Pathologists, or CAP. We also perform research and developmentthat led to our current assays, and continue to perform for our planned assays, at this same facility. In addition, we manufacture our microfluidic channels,related equipment and certain reagents. The assays we offer and intend to offer are classified as laboratory developed tests, or LDTs, under CLIA regulations.CLIA certification is required before any clinical laboratory, including ours, may perform testing on human specimens for the purpose of obtaininginformation for the diagnosis, prevention, or treatment of disease or the assessment of health. In addition, we participate in and have received CAPaccreditation, which includes rigorous bi-annual laboratory inspections and adherence to specific quality standards.Key Factors Affecting our Results of Operations and Financial ConditionOur overall long-term growth plan depends on our ability to continue to develop and commercialize products and assays through our CLIA-certified, CAP-accredited, and state-licensed laboratory. We have commercialized our Target-Selector assays for breast cancer, non-small cell lung cancer, or NSCLC, gastriccancer, colorectal cancer, prostate cancer, melanoma, pancreaticobiliary cancer, and ovarian cancer, and plan to continue to launch a series of cancerdiagnostic assays for different predictive biomarkers assays in the United States as LDTs performed in our laboratory, and enhance revenue for these productsthrough the efforts of our sales and marketing organization. Our sales strategy is to engage medical oncologists, surgical oncologists, urologists,pulmonologists, pathologists and other physicians in the United States at private and group practices, hospitals and cancer centers. We also plan to continueto evaluate potential opportunities for the commercialization of our products and assays in other countries. Additionally, sales of our proprietary bloodcollection tubes, or BCTs, which allow for the intact transport of liquid biopsy samples for research use only, or RUO, from regions around the world,commenced during 2018. In addition to testing for physicians and their patients, we offer clinical trials testing and research services to help increase theefficiency and economic viability of clinical trials for pharmaceutical and biopharmaceutical companies and clinical research organizations both within andoutside of the United States. We are currently exploring the possibility of introducing ctDNA technology outside the United States as part of IVD test kitsand/or testing systems utilizing66our Target-Selector technologies. We plan to continue to cooperate with partners on accessing markets internationally either through partnerships with localgroups and distributors or through the development of IVDs and/or test systems, including instrumentation. We also have a research and developmentprogram focused on technology enhancements, novel platform development, and evaluating clinical applications for our cancer diagnostic tests in differentcancer types and clinical settings.To facilitate market adoption of our products and assays, we anticipate having to successfully complete additional clinical utility studies with clinicalsamples to generate clinical utility data and then publish our results in peer-reviewed scientific journals. Our ability to complete such clinical studies isdependent upon our ability to leverage our collaborative relationships with leading institutions to facilitate our research, to conduct the appropriate clinicalstudies and to obtain favorable clinical data. We collaborate with physicians and researchers at Sarah Cannon Research Institute, University of Colorado, theUniversity of California, San Diego, the John Wayne Cancer Institute, Columbia University, Johns Hopkins Medical Institute, Vanderbilt University,University of Texas Southwestern Medical Center, and Georgetown University and plan to expand our collaborative relationships to include other keythought leaders at other institutions for the cancer types we target with our Target-Selector commercialized assays and our planned future assays, as well asfor our current and planned future products. Such relationships help us develop and validate the effectiveness and utility of our products, commercializedassays and our planned future assays in specific, clinical settings and provide us access to patient samples and data.We believe that the factors discussed in the following paragraphs have had and are expected to continue to have a material impact on our results ofoperations and financial condition.RevenuesOur revenues are generated from diagnostic services provided to physicians and billed to third-party insurance payers such as managed care organizations,Medicare and Medicaid and patients for any deductibles, coinsurance or copayments that may be due. Commencing on March 31, 2017, we recognizerevenue related to commercial assays delivered and billed to Medicare and other third-party payers on an accrual basis when amounts that will ultimately berealized can be estimated upon delivery, whereby prior to March 31, 2017, we recognized revenues for such services on a cash basis as collected because theamounts ultimately expected to be received could not be estimated upon delivery due to insufficient collection history experience. Commencing on January1, 2018, we recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers, or ASC 606, which requires that an entity recognizerevenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to inexchange for those goods or services.We bill third-party payers on a fee-for-service basis at our list price and third-party commercial revenue is recorded net of contractual discounts, payer-specific allowances and other reserves. Our development services revenues are supported by contractual agreements and generated from assay developmentservices provided to entities, as well as certain other diagnostic services provided to physicians. Diagnostic services are completed upon the delivery of assayresults to the prescribing physician, at which time we bill for the service.Our gross commercial revenues billed are subject to estimated deductions for such contractual discounts, payer-specific allowances and other reserves toarrive at reported net revenues, which relate to differences between amounts billed and corresponding amounts estimated to be subsequently collected. Thesethird-party payer discounts and sales allowances are estimated based on a number of assumptions and factors, including historical payment trends,seasonality associated with the annual reset of patient deductible limits on January 1 of each year, and current and estimated future payments. The estimatesof amounts that will ultimately be realized from commercial diagnostic services require significant judgment by us. Patients do not enter into directagreements with us that commit them to pay any portion of the cost of the tests in the event that they have not met their annual deductible limit under theirinsurance policy, if any, or if their insurance otherwise declines to reimburse us. Adjustments to the estimated payment amounts are recorded at the time offinal collection and settlement of each transaction as an adjustment to commercial revenue.Costs and ExpensesWe classify our costs and expenses into four categories: cost of revenues, research and development, sales and marketing, and general and administrative. Ourcosts and expenses principally consist of facility costs and overhead, personnel costs, outside services and consulting costs, laboratory consumables,development costs, and legal fees.67Cost of Revenues. Our cost of revenues consists principally of facility costs and overhead, personnel costs, and laboratory and manufacturing supplies andmaterials. We are pursuing various strategies to reduce and control our cost of revenues, including automating aspects of our processes, developing moreefficient technology and methods, attempting to negotiate improved terms and volume discounts with our suppliers and exploring relocating our operationsto a lower-cost facility.Research and Development Expenses. We incur research and development expenses principally in connection with our efforts to develop and improve ourtests. Our primary research and development expenses consist of direct personnel costs, laboratory equipment and consumables, and overhead expenses. Weanticipate that research and development expenses will remain consistent in the near-term, principally to develop and validate tests in our pipeline and toperform work associated with clinical utility studies and development collaborations. In addition, we expect that our costs related to collaborations withresearch and academic institutions will increase. All research and development expenses are charged to operations in the periods in which they are incurred.Sales and Marketing Expenses. Our sales and marketing expenses consist principally of personnel and related overhead costs for our sales team and theirsupport personnel, travel and entertainment expenses, and other selling costs including sales collaterals and trade shows. We anticipate sales and marketingexpenses to increase as we work on generating higher revenues and marketing additional offerings.General and Administrative Expenses. General and administrative expenses consist principally of personnel-related expenses, professional fees, such as legal,accounting and business consultants, insurance costs, and other general expenses. We expect that our general and administrative expenses will increase as weexpand our business operations. We further expect that general and administrative expenses will increase due to increased information technology, legal,insurance, accounting and financial reporting expenses associated with expanded commercial activities.Critical Accounting Policies and Significant Judgments and EstimatesOur management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires us to makeestimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities.On an ongoing basis, we evaluate our estimates based on historical experience and make various assumptions, which management believes to be reasonableunder the circumstances, which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under different assumptions or conditions.The notes to our audited financial statements, which are included elsewhere in this Annual Report, contain a summary of our significant accounting policies.We consider the following accounting policies critical to the understanding of the results of our operations:•Revenue recognition;•stock-based compensation; and•going concern.Revenue Recognition and Related ReservesOur commercial revenues are generated from diagnostic services provided to patient’s physicians and billed to third-party insurance payers such as managedcare organizations, Medicare and Medicaid and patients for any deductibles, coinsurance or copayments that may be due. Through December 31, 2017, werecognized revenue in accordance with the provisions of Accounting Standards Codification, or ASC, 954-605, Health Care Entities—Revenue Recognition,which required that four basic criteria must be met prior to recognition of revenue: (1) persuasive evidence of an arrangement existed; (2) delivery hadoccurred and title and the risks and rewards of ownership had been transferred to the client or services had been rendered; (3) the price was fixed ordeterminable; and (4) collectability was reasonably assured. Commencing on March 31, 2017, we recognized commercial revenue related to billings forassays delivered and billed to Medicare and other third-party payers on an accrual basis when amounts that will ultimately be realized can be estimated upondelivery, whereby prior to March 31, 2017, we recognized revenues for our commercial diagnostic services on a cash basis as collected because the amounts68ultimately expected to be received could not be estimated upon delivery due to insufficient collection history experience. Commencing on January 1, 2018,we recognize revenue in accordance with ASC 606, Revenue from Contracts with Customers, or ASC 606, which requires that an entity recognize revenuewhen it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to inexchange for those goods or services. We adopted the provisions of ASC 606 using the modified retrospective application method applied to all contracts,which did not impact amounts previously reported by us, nor did it require a cumulative effect adjustment upon adoption, as our method of recognizingrevenue under ASC 606 was analogous to the method utilized immediately prior to adoption. ContractsFor our commercial revenues, while we market directly to physicians, our customer is the patient. Patients do not enter into direct agreements with us thatcommit either them to pay any portion of the cost of the tests if they have not met their annual deductible limit under their insurance policy, if any, or if theirinsurance otherwise declines to reimburse us. Accordingly, we establish a contract with a commercial patient in accordance with other customary businesspractices, as follows: •Approval of a contract is established via the order and accession, which are submitted by the patient’s physician.•We are obligated to perform our diagnostic services upon receipt of a sample from a physician, and the patient and/or applicable payer are obligatedto reimburse us for services rendered based on the patient’s insurance benefits.•Payment terms are a function of a patient’s existing insurance benefits, including the impact of coverage decisions with CMS and applicablereimbursement contracts established between us and payers, unless the patient is a self-pay patient, whereby we bill the patient directly after theservices are provided.•Once we deliver a patient’s assay result to the ordering physician, the contract with a patient has commercial substance, as we are legally able tocollect payment and bill an insurer and/or patient, regardless of payer contract status or patient insurance benefit status.•Consideration associated with commercial revenues is considered variable and constrained until fully adjudicated, with net revenues recorded to theextent that it is probable that a significant reversal will not occur. Our development services revenues are supported by contractual agreements and generated from assay development services provided to entities, as well ascertain other diagnostic services provided to physicians, and revenues are recognized upon delivery of the performance obligations in the contract.Performance ObligationsA performance obligation is a promise in a contract to transfer a distinct good or service, or a bundle of goods or services, to the customer. For commercialand development services revenues, our contracts have a single performance obligation, which is satisfied upon rendering of services, which culminates inthe delivery of a patient’s assay result(s) to the ordering physician or entity. The duration of time between accession receipt and delivery of a valid assayresult to the ordering physician or entity is typically less than two weeks. Accordingly, we elected the practical expedient and therefore, we do not disclosethe value of unsatisfied performance obligations.Transaction PriceThe transaction price is the amount of consideration that we expect to collect in exchange for transferring promised goods or services to a customer,excluding amounts collected on behalf of third parties, such as sales taxes. The consideration expected from a contract with a customer may include fixedamounts, variable amounts, or both. Our gross commercial revenues billed, and corresponding gross accounts receivable, are subject to estimated deductionsfor such allowances and reserves to arrive at reported net revenues, which relate to differences between amounts billed and corresponding amounts estimatedto be subsequently collected, and is deemed to be variable although the variability is not explicitly stated in any contract. Rather, the implied variability isdue to several factors, such as the payment history or lack thereof for third-party payers, reimbursement rate changes for contracted and non-contractedpayers, any patient co-payments, deductibles or compliance incentives, the existence of secondary payers and claim denials. We estimate the amount ofvariable consideration using the most likely amount approach to estimating variable consideration for third-party payers, including direct patient bills,69whereby the estimated reimbursement for services are established by payment histories on CPT codes for each payer, or similar payer types. When nopayment history is available, the value of the account is estimated at Medicare rates, with additional other payer-specific reserves taken as appropriate.Collection periods for billings on commercial revenues range from less than 30 days to several months, depending on the contracted or non-contracted natureof the payer, among other variables. The estimates of amounts that will ultimately be realized from commercial diagnostic services for non-contracted payersrequire significant judgment by management.We limit the amount of variable consideration included in the transaction price to the unconstrained portion of such consideration. Revenue is recognized upto the amount of variable consideration that is not subject to a significant reversal until additional information is obtained or the uncertainty associated withthe additional payments or refunds is subsequently resolved. Differences between original estimates and subsequent revisions, including final settlements,represent changes in the estimate of variable consideration and are included in the period in which such revisions are made. We monitor our estimates oftransaction price to depict conditions that exist at each reporting date. If we subsequently determine that we will collect more consideration than weoriginally estimated for a contract with a customer, we will account for the change as an increase in the estimate of the transaction price in the periodidentified as an increase to revenue. Similarly, if we subsequently determine that the amount it expects to collect from a customer is less than it originallyestimated, we will generally account for the change as a decrease in the estimate of the transaction price as a decrease to revenue, provided that suchdownward adjustment does not result in a significant reversal of cumulative revenue recognized. Revenue recognized from changes in transaction prices wasnot significant during the year ended December 31, 2018.Allocate Transaction PriceFor our commercial revenues, the entire transaction price is allocated to the single performance obligation contained in a contract with a customer. For ourdevelopment services revenues, the contracted transaction price is allocated to each single performance obligation contained in a contract with a customer asperformed.Point-in-time RecognitionOur single performance obligation is satisfied at a point in time, and that point in time is defined as the date a patient’s successful assay result is delivered tothe patient’s ordering physician or entity. We consider this date to be the time at which the patient obtains control of the promised diagnostic assay service. Contract BalancesThe timing of revenue recognition, billings and cash collections results in accounts receivable recorded in our condensed balance sheets. Generally, billingoccurs subsequent to delivery of a patient’s test result to the ordering physician or entity, resulting in an account receivable. Practical ExpedientsWe do not adjust the transaction price for the effects of a significant financing component, as at contract inception, we expect the collection cycle to be oneyear or less.We expense sales commissions when incurred because the amortization period is one year or less, which are recorded within sales and marketing expenses. We incur certain other costs that are incurred regardless of whether a contract is obtained. Such costs are primarily related to legal services and patientcommunications. These costs are expensed as incurred and recorded within general and administrative expenses. Stock-Based CompensationWe account for stock-based compensation under the provisions of ASC Topic 718, Compensation—Stock Compensation, which requires the measurementand recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values on the grant date. Weestimate the fair value of stock option awards on the date of70grant using the Black-Scholes option pricing model, or Black-Scholes valuation model. The fair value of RSUs is determined by the price of our commonstock on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periodsusing the straight-line method. We estimate forfeitures at the time of grant and revise our estimates in subsequent periods if actual forfeitures differ from thoseestimates.We account for stock-based compensation awards to non-employees in accordance with ASC Topic 505-50, Equity-Based Payments to Non-Employees.Under ASC 505-50, we determine the fair value of the warrants or stock-based compensation awards granted as either the fair value of the considerationreceived, or the fair value of the equity instruments issued, whichever is more reliably measurable. All issuances of equity instruments issued to non-employees as consideration for goods or services received by us are accounted for based on the fair value of the equity instruments issued. These awards arerecorded in expense and additional paid-in capital in stockholders’ equity over the applicable service periods based on the fair value of the options at the endof each period.Calculating the fair value of stock-based awards requires the input of highly subjective assumptions into the Black-Scholes valuation model. Stock-basedcompensation expense is calculated using our best estimate, which involves inherent uncertainties, and the application of our management’s judgment.Significant estimates include the fair value of our common stock at the date of grant for awards granted prior to our initial public offering, the expected life ofthe stock option, stock price volatility, risk-free interest rate and forfeiture rate.Going ConcernWe assess and determine our ability to continue as a going concern under the provisions of ASC Topic 205-40, Presentation of Financial Statements—GoingConcern, which requires us to evaluate whether there are conditions or events that raise substantial doubt about our ability to continue as a going concernwithin one year after the date that our annual and interim financial statements are issued. Certain additional financial statement disclosures are required ifsuch conditions or events are identified. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidationbasis of accounting.Determining the extent, if any, to which conditions or events raise substantial doubt about our ability to continue as a going concern, or the extent to whichmitigating plans sufficiently alleviate any such substantial doubt, as well as whether or not liquidation is imminent, requires significant judgment by us. Wehave determined that there is substantial doubt about our ability to continue as a going concern for the one-year period following the date that our financialstatements for the year ended December 31, 2018 were issued, which have been prepared assuming that we will continue as a going concern. We have notmade any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities thatmay result from the possible inability of us to continue as a going concern.Reverse SplitIn July 2018, our stockholders approved, and we filed, an amendment to our Certificate of Amendment of Certificate of Incorporation to effect a one-for-thirtyreverse stock split of our outstanding common stock. All references to share and per share amounts in our condensed financial statements and accompanyingnotes have been retroactively restated to reflect the one-for-thirty reverse stock split, except for the authorized number of shares of the Company’s commonstock of 150,000,000 shares, which was not affected by the one-for-thirty reverse stock split.71Results of OperationsYears Ended December 31, 2017 and 2018The following table sets forth certain information concerning our results of operations for the periods shown: For the year ended December 31, Change 2017 2018 $ % (dollars in thousands) Net revenues $5,069 $3,250 $(1,819) (36%)Cost of revenues 9,345 10,052 707 8%Research and developmentexpenses 3,365 4,469 1,104 33%General and administrativeexpenses 7,190 7,074 (116) (2%)Sales and marketing expenses 6,344 5,915 (429) (7%)Loss from operations (21,175) (24,260) (3,085) 15%Interest expense, net (482) (310) 172 (36%)Other income 51 - (51) (100%)Loss before income taxes (21,606) (24,570) (2,964) 14%Income tax expense (8) (2) 6 (75%)Net loss (21,614) (24,572) (2,958) 14%Deemed dividend related towarrants down round provision - (636) (636) 0%Net loss attributable to commonshareholders $(21,614) $(25,208) $(3,594) 17% The composition of the Company’s net revenues recognized during the years ended December 31, 2017 and 2018, disaggregated by source and timing ofrecognition, are as follows: For the year ended December 31, 2017 2018 Net commercial revenues recognized upon delivery $3,570,337 $3,051,562 Development services revenues recognized upon delivery 272,350 198,736 Commercial revenues recognized upon cash collection 1,225,976 — Total net revenues $5,068,663 $3,250,298Net RevenuesNet revenues recognized on an accrual basis were approximately $3,250,000 for the year ended December 31, 2018, compared with approximately$3,843,000 for the same period in 2017, a decrease of $593,000, or 15%. As reported, net revenues were approximately $3,250,000 for the year endedDecember 31, 2018, compared with approximately $5,069,000 for the same period in 2017, a decrease of $1,819,000, or 36%. All $3,250,000 of net revenuesrecognized during the year ended December 31, 2018, were recognized on an accrual basis, as compared to the same period in 2017 when $3,843,000 of the$5,069,000 net revenues were recognized on an accrual basis and $1,226,000 of the net revenues were recognized upon the receipt of cash. During the threemonths ended March 31, 2017, we converted from cash-based revenue recognition for our commercial revenues to accrual-based revenue recognition. As aresult of the change to accrual-based revenue recognition, we recognized total nonrecurring net revenue of $843,000 during the year ended December 31,2017, which represents the estimated value of net accounts receivable at December 31, 2016 that was recognized as revenue during the year ended December31, 2017, and the incremental net revenue recorded as a result of the change was $1,139,000, which represents the total amount of net revenue recorded inexcess of the amount of commercial cash collections.72Total cash collections for commercial cases were $2,648,000 during the year ended December 31, 2018 as compared to $3,658,000 during the same period in2017, a decrease of $1,000,000 due to a decrease in accession volume and the expected value per accession received prior to and during the year endedDecember 31, 2018 as compared to the same period in 2017. The net estimated revenue per commercial accession delivered since converting from cash-basedrevenue recognition to accrual-based revenue recognition on March 31, 2017 and through December 31, 2017 was approximately $988, based on 2,880commercial accessions delivered and approximately $2,845,000 in corresponding commercial accrual-based revenues during that period. The $1,819,000decrease in net revenue recognized was primarily related to a decrease in the number of commercial accessions received during the year ended December 31,2018 as compared to the same period in 2017 even though the value per commercial accession received slightly increased, as follows: Year ended December 31, Change 2017 2018 # / $ % # Commercial accessions received 3,768 3,273 (495) (13%)$ Value estimated per commercial accession received *$1,117 $1,197 $80 7% *Commercial value per accession received is reflected as expect reimbursement (gross billed less contractual allowance).Additionally, there was a $74,000 decrease in development services revenues during the year ended December 31, 2018 as compared to the same period in2017, which was primarily related to a decrease in development services case volumes delivered and a decrease in the estimated value per developmentservices case delivered, as follows: Year ended December 31, Change 2017 2018 # % # Development services cases delivered 747 620 (127) (17%)$ Value estimated per development services accession delivered$365 $321 $(44) (12%)Costs and ExpensesIn the first quarter of 2018 we announced an initiative to reduce the use of cash. In July, we extinguished our term debt facility with Oxford Financialeliminating approximately $2.1 million in annual principal and interest payments and in other categories an additional approximate $1.2 million for a totalreduction of approximately $3.3 million in use of cash on an annualized basis. We also anticipate realizing additional reductions in use of cash in the nearfuture from outsourcing our microfluidic channel manufacturing to a contract manufacturer. In addition, our current facility lease will expire in July 2020,and we anticipate that we will be able to realize further reductions by obtaining a replacement facility lease with more favorable terms.Cost of Revenues. Cost of revenues was approximately $10,052,000 for the year ended December 31, 2018, compared with approximately $9,345,000 for theyear ended December 31, 2017, an increase of $707,000, or 8%. The increase was primarily attributable to an increase of $506,000 in facilities, repairs,maintenance and depreciation expenses, and allocated information technology and facility charges as we implemented our pathology partnership initiative,invested in upgrading our laboratory equipment and information system and maintaining our facility, as well as increases of $174,000 in materials, shippingand other direct costs and $290,000 in third-party service provider and consulting costs associated with validation and quality control work, and an increaseof $306,000 in computer equipment maintenance, software and laboratory equipment maintenance expenses. These increases were partially offset by adecrease of $435,000 resulting from greater laboratory costs charged to research and development expenses associated with research and developmentactivities, as well as a decrease in personnel costs of $154,000 during 2018 due to labor allocations to research and development to support efforts to bringnew products and services to market.Research and Development Expenses. Research and development expenses were approximately $4,469,000 for the year ended December 31, 2018, comparedwith approximately $3,365,000 for the year ended December 31, 2017, an increase of $1.1 million, or 33%. The increase was primarily attributable to anincrease of $435,000 in laboratory costs allocated from cost of revenues, an increase of $443,000 in personnel costs related to labor allocations to researchand development to support efforts to bring new products and services to market, an increase of $121,000 in allocated facilities charges, and an73increase of $116,000 in consulting, outside services and temporary labor. These increases were partially offset by a decrease of $26,000 in computerequipment, software and laboratory equipment maintenance costs.General and Administrative Expenses. General and administrative expenses were approximately $7,074,000 for the year ended December 31, 2018, comparedwith approximately $7,190,000 for the year ended December 31, 2017, a decrease of $116,000, or 2%, resulting from cost savings efforts. The decrease wasprimarily due to a decrease of $382,000 in stock-based compensation expense, a decrease of $375,000 in facilities, depreciation, repairs and maintenancecosts, a decrease of $85,000 in computer software and service costs, and a decrease of $15,000 in legal fees. These decreases were partially offset by anincrease of $317,000 in personnel costs and travel expenses, an increase of $186,000 in consulting, outside service provider costs, an increase of $160,000 inoffice related costs, an increase of $62,000 in directors and officers insurance costs, and an increase of $26,000 in accounting and audit fees.Sales and Marketing Expenses. Sales and marketing expenses were approximately $5,915,000 for the year ended December 31, 2018 compared withapproximately $6,344,000 for the year ended December 31, 2017, a decrease of $429,000, or 7%. The decrease was primarily attributable to a decrease of$310,000 in personnel and travel costs due to lower headcount, as well as decreases of $128,000 in marketing materials, trade show and conference costs and$20,000 in consulting and outside service costs, which were partially offset by an increase of $29,000 in third-party service provider and consulting fees.Income Tax ExpenseOver the past several years we have generated operating losses in all jurisdictions in which we may be subject to income taxes. As a result, we haveaccumulated significant net operating losses and other deferred tax assets. Because of our history of losses and the uncertainty as to the realization of thosedeferred tax assets, a full valuation allowance has been recognized. We do not expect to report a provision for income taxes until we have a history ofearnings, if ever, that would support the realization of our deferred tax assets.We have not completed a study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since ourformation, due to the complexity and cost associated with such a study, and the fact that there may be additional ownership changes in the future, however,we believe ownership changes likely occurred in each year from 2015 through 2018. As a result, we have estimated that the use of our net operating loss islimited and the remaining net operating loss carryforwards and research and development credits we estimate can be used in the future remain fully offset by avaluation allowance to reduce the net asset to zero.InflationWe do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented.Liquidity and Capital ResourcesWe are actively working to improve our financial position and enable the growth of our business, by raising new capital and generating revenues.Equity FinancingsIn May 2015, the SEC declared effective a shelf registration statement filed by us, which expired in May 2018. The shelf registration statement allowed us toissue any combination of our common stock, preferred stock, debt securities and warrants from time to time for an aggregate initial offering price of up to$50 million, subject to certain limitations for so long as our public float was less than $75 million. Pursuant to an exclusive placement agent agreement datedMarch 28, 2017 between us and Roth Capital Partners, LLC as lead placement agent, and WestPark Capital and Chardan Capital as co-placement agents, asecurities purchase agreement for an offering of 144,000 shares of our common stock was effected under this registration statement at a per share price of$64.50. In a concurrent private placement, we sold unregistered warrants to purchase up to an aggregate of 72,000 shares of our common stock that closedconcurrently with the offering common stock sold pursuant to this shelf registration statement, of which none have been subsequently exercised. All warrantssold in this offering have a per share exercise price of $75.00 and expire on October 1, 2022. The closing of the sale of these securities to the purchasersoccurred on March 31, 2017, when we received approximately $8.6 million of net cash proceeds. Pursuant to an exclusive placement agent agreement datedDecember 5, 2017 between us and Dawson James Securities, Inc. as lead placement agent,74and WestPark Capital as co-placement agent, a securities purchase agreement for a registered direct offering of 164,166 shares of our common stock waseffected under this registration statement at a per share price of $20.40. The placement agent was issued a warrant to purchase 8,208 shares of common stockat an exercise price of $25.50 per share, which was first exercisable on June 5, 2018 and expires on December 5, 2022. The closing of the sale of thesesecurities occurred on December 8, 2017, when we received approximately $2.9 million of net cash proceeds.Pursuant to a common stock and warrant purchase agreement dated August 9, 2017, we received net cash proceeds of approximately $2.0 million as a resultof the sale of 47,821 shares of our common stock and warrants at a combined offering price of $45.00 per share. Subsequent to the closing of this offering, noadditional cash proceeds had been received from the exercise of warrants sold in this offering, with approximately $2.2 million in gross warrant proceedsremaining outstanding and available to be exercised at $45.00 per share until their expiration in August 2022.On January 30, 2018, we received net cash proceeds of approximately $13.3 million as a result of the closing of a follow-on public offering. Subsequent tothe closing of this offering, no additional cash proceeds have been received from the exercise of warrants sold in this offering, with approximately$16.4 million in gross warrant proceeds remaining outstanding and available to be exercised at $3.16 per share, subject to down round adjustment, until theirexpiration in January 2023.In May 2018, the SEC declared effective a shelf registration statement filed by us, which expires in May 2021. The shelf registration statement allows us toissue any combination of our common stock, preferred stock, debt securities and warrants from time to time for an aggregate initial offering price of up to$50 million, subject to certain limitations for so long as our public float is less than $75 million.On August 13, 2018, we completed a rights offering. Pursuant to the rights offering, we sold an aggregate of 11,587 units consisting of an aggregate of 11,587shares of Series A Preferred Stock and 2,549,140 warrants, with each warrant exercisable for one share of our common stock at an exercise price of $4.53 pershare, resulting in net proceeds to us of approximately $10.2 million, after deducting expenses relating to the rights offering, including dealer-manager feesand expenses, and excluding any proceeds received upon exercise of any warrants. On September 20, 2018, we completed an offering of 642,438 shares of our common stock and prefunded warrants to purchase up to an aggregate of 120,000shares of our common stock. The shares were sold at a purchase price of $3.285 per share and the pre-funded warrants were sold at a purchase price of $3.275per pre-funded warrant which represents the per share purchase price for the shares less the $0.01 per share exercise price for each such pre-funded warrant.The net proceeds to us from this offering were approximately $2.2 million, after deducting expenses related to the offering including dealer-manager fees andexpenses, and excluding any proceeds received upon exercise of any warrants. In addition, in a concurrent private placement, we issued to purchasers awarrant to purchase one share of our common stock for each share and pre-funded warrant purchased for cash in the offering. All warrants issued in thisoffering have an exercise price of $3.16 per share, are exercisable upon the six-month anniversary of issuance and expire five years from such date.Cash FlowsOur net cash flow from operating, investing and financing activities for the periods below were as follows: For the year ended December 31, 2017 2018 (dollars in thousands) Cash provided by/(used in): Operating activities $(19,651) $(22,355)Investing activities (1,400) (145)Financing activities 18,588 23,777 Net increase/(decrease) in cash $(2,463) $1,277Cash Used in Operating Activities. Net cash used in operating activities was $22.4 million for the year ended December 31, 2018, compared to net cash usedin operating activities of $19.7 million for the year ended December 31, 2017. The net increase of $2.7 million in cash used was primarily related to anincrease of $3.0 million in cash used to fund our net loss, as75well as an increase of $0.7 million in net cash provided by operating assets and liabilities and a net decrease of $0.4 million in non-cash expenses primarilyrelated to stock-based compensation expense.Cash Used in Investing Activities. Net cash used in investing activities of approximately $145,000 and $1,400,000 during the years ended December 31,2018 and 2017, respectively, was related to purchases of fixed assets.Cash Provided by Financing Activities. Net cash provided by financing activities was $23.8 million for the year ended December 31, 2018, compared to netcash provided by financing activities of $18.6 million for the year ended December 31, 2017. Our primary sources of cash from financing activities during theyear ended December 31, 2018 consisted of $13.3 million, $10.1 million and $2.2 million in net proceeds from our offerings in January, August andSeptember 2018, respectively, which were partially offset by $1.9 million of principal payments made on indebtedness. Our primary sources of cash fromfinancing activities during the year ended December 31, 2017 consisted of $8.6 million, $2.0 million and $2.9 million in net proceeds from our offerings inMarch, August and December 2017, respectively, as well as proceeds of $7.5 million from the exercise of common stock warrants sold in our offering inOctober 2016, which were partially offset by $2.6 million of principal payments made on indebtedness.Liquidity, Capital Resources and Expenditure RequirementsWe expect to continue to incur substantial operating losses in the future. It may take several years to achieve positive operational cash flow, or we may notever achieve positive operational cash flow. We expect that we will use the net proceeds from our sale of equity securities, if any, cash received from thelicensing of our technology, if any, and our revenues from operations to support increased sales and marketing activities, fund further research anddevelopment, clinical utility studies and future enhancements of our assays, acquire equipment, implement automation and scale our capabilities to preparefor significant assay volume, for general corporate purposes and to fund ongoing operations and the expansion of our business, including the increased costsassociated with expanded commercial activities. We may also use the net proceeds from our sale of equity securities, if any, cash received from the licensingof our technology, if any, and our revenues from operations to acquire or invest in businesses, technologies, services or products, although we do not haveany current plans to do so. On January 18, 2019, we completed an offering of 990,000 shares of our common stock at a purchase price of $2.25 per shareraising net proceeds of approximately $2.0 million. On February 12, 2019, we completed an offering of 6,250,000 shares of our common stock and warrantsat a combined offering price of $1.20 per unit, raising approximately $6.8 million, and on March 11, 2019, the underwriters exercised their overallotmentoption under the February 2019 transaction and purchased 538,867 shares from us for total proceeds of $601,000. In addition, on March 19, 2019, wecompleted an offering of 5,950,000 shares of common stock and warrants at an offering price of $1.37 per share raising approximately $7.5 million in netproceeds.As of December 31, 2018, our cash totaled $3.4 million, and our outstanding net indebtedness totaled $1.6 million. While we currently are in thecommercialization stage of operations, we have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeablefuture. We have determined that there is substantial doubt about our ability to continue as a going concern for the one-year period following the date that ourfinancial statements for the year ended December 31, 2018 were issued, and we expect that we will need additional financing to execute on our current orfuture business strategies beyond the fourth quarter of 2019.On September 20, 2018 we completed an offering of 642,438 shares of our common stock and prefunded warrants to purchase up to an aggregate of 120,000shares of our common stock. The shares were sold at a purchase price of $3.285 per share and the pre-funded warrants were sold at a purchase price of $3.275per pre-funded warrant which represents the per share purchase price for the shares less the $0.01 per share exercise price for each such pre-funded warrant.The net proceeds to us from this offering were approximately $2.2 million, after deducting expenses related to the offering including dealer-manager fees andexpenses, and excluding any proceeds received upon exercise of any warrants. In addition, in a concurrent private placement, we issued to purchasers awarrant to purchase one share of our common stock for each share and pre-funded warrant purchased for cash in the offering. All warrants issued in thisoffering have an exercise price of $3.16 per share, are exercisable upon the six-month anniversary of issuance and expire five years from such date.On August 13, 2018, we completed a rights offering. Pursuant to the rights offering, we sold an aggregate of 11,587 units consisting of an aggregate of 11,587shares of Series A Preferred Stock and 2,549,140 warrants, with each warrant exercisable for one share of our common stock at an exercise price of $4.53 pershare, resulting in net proceeds to us of76approximately $10.2 million, after deducting expenses relating to the rights offering, including dealer-manager fees and expenses, and excluding anyproceeds received upon exercise of any warrants.In May 2018, the SEC declared effective a shelf registration statement filed by us, which expires in May 2021. The shelf registration statement allows us toissue any combination of our common stock, preferred stock, debt securities and warrants from time to time for an aggregate initial offering price of up to$50 million, subject to certain limitations for so long as our public float is less than $75 million.On January 30, 2018, we received net cash proceeds of approximately $13.3 million from the closing of a follow-on public offering of 1,095,153 shares of ourcommon stock and warrants to purchase up to an aggregate of 1,095,153 shares of our common stock at a combined offering price of $13.50 per unit.Subsequent to the closing of this offering, no additional cash proceeds have been received from the exercise of warrants sold in this offering, withapproximately $16.4 million in gross warrant proceeds remaining outstanding and available to be exercised at $3.16 per share, which is subject to downround adjustment, until their expiration in January 2023.We expect that we will need additional financing to execute on our current or future business strategies. Until we can generate significant cash fromoperations, including assay revenues, we expect to continue to fund operations with the proceeds from offerings of our equity securities or debt, ortransactions involving product development, technology licensing or collaboration. For example, we have an effective shelf registration statement on filewith the SEC which allows us to issue any combination of our common stock, preferred stock, debt securities and warrants from time to time, subject tocertain restrictions that apply for so long as our public float is less than $75 million. The specific terms of additional future offerings, if any, under this shelfregistration statement would be established at the time of such offerings. We can provide no assurances that any sources of a sufficient amount of financingwill be available to us on favorable terms, if at all. If we are unable to raise a sufficient amount of financing in a timely manner, we would likely need to scaleback our general and administrative activities and certain of our research and development activities. Our forecast pertaining to our current financialresources and the costs to support our general and administrative and research and development activities are forward-looking statements and involve risksand uncertainties. Actual results could vary materially and negatively as a result of a number of factors, including:•our ability to secure financing and the amount thereof;•the costs of operating and enhancing our laboratory facilities;•the costs of developing our anticipated internal sales and marketing capabilities;•the scope, progress and results of our research and development programs, including clinical utility studies;•the scope, progress, results, costs, timing and outcomes of the clinical utility studies for our diagnostic assays;•our ability to manage the costs for manufacturing our microfluidic channels;•the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;•our ability to obtain adequate reimbursement from governmental and other third-party payers for our assays and services;•the costs of additional general and administrative personnel, including accounting and finance, legal and human resources, as a result of becoming apublic company; •our ability to collect revenues; and•other risks discussed in our other filings with the SEC.We may raise additional capital to fund our current operations and to fund expansion of our business to meet our long-term business objectives throughpublic or private equity offerings, debt financings, borrowings or strategic partnerships coupled with an investment in our company or a combination thereof.If we raise additional funds through the issuance of convertible debt securities, or other debt securities, these securities could be secured and could haverights senior to those of our common stock. In addition, any new debt incurred by us could impose covenants that restrict our operations. The issuance of anynew equity securities will also dilute the interest of our current stockholders. Given the risks associated with our business, including our unprofitableoperating history and our ability or inability to develop additional assays, additional capital may not be available when needed on acceptable terms, or at all.If adequate funds are not available, we will need to curb our expansion plans or limit our research and development activities, which would have a materialadverse impact on our business prospects and results of operations.77Off-Balance Sheet ArrangementsWe have not engaged in any off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K. Item 7A. Quantitative and Qualitative Disclosures about Market RiskNot applicable. 78Item 8. Financial Statements and Supplementary DataBiocept, Inc.Index to Financial Statements PageNo.Financial Statements: Report of Independent Registered Public Accounting Firm 80Balance Sheets at December 31, 2018 and 2017 81Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2018 and 2017 82Statements of Shareholders’ Equity for the Years Ended December 31, 2018 and 2017 83Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 84Notes to Financial Statements 87 79REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Biocept, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Biocept, Inc. (“Company”) as of December 31, 2018 and 2017, and the related statements of operationsand comprehensive loss, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2018, and the related notes(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position ofthe Company as of December 31, 2018 and 2017 and the results of its operations and its cash flows for each of the two years in the period ended December31, 2018, in conformity with accounting principles generally accepted in the United States of America. Adoption of New Accounting StandardAs discussed in Note 3 to the financial statements, the Company changed its method of accounting for revenue from contracts with customers as a result ofthe adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers effective January 1, 2018, under the modifiedretrospective method. Going Concern Uncertainty The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to thefinancial statements, the Company has incurred recurring losses from operations and is dependent on future financings to fund operations. These conditionsraise substantial doubt about its ability to continue as a going concern. Management’s plan regarding these matters is also described in Note 2. The financialstatements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financialstatements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations ofthe Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, norwere we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding ofinternal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control overfinancial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, andperforming procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures inthe financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well asevaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2005./s/ Mayer Hoffman McCann P.C. San Diego, CaliforniaMarch 28, 2019 80Biocept, Inc.Balance Sheets December 31, December 31, 2017 2018 Current assets: Cash $2,146,611 $3,423,373 Accounts receivable, net 1,193,426 1,574,325 Inventories, net 498,702 587,222 Prepaid expenses and other current assets 416,600 425,961 Total current assets 4,255,339 6,010,881 Fixed assets, net 3,123,567 2,739,422 Total assets $7,378,906 $8,750,303 Current liabilities: Accounts payable $1,269,953 $2,039,718 Accrued liabilities 1,752,363 1,928,393 Supplier financings 61,226 — Current portion of equipment financings 408,992 641,536 Current portion of credit facility, net 1,168,811 — Total current liabilities 4,661,345 4,609,647 Non-current portion of equipment financings 1,150,063 985,015 Non-current portion of deferred rent 271,464 113,122 Total liabilities 6,082,872 5,707,784 Commitments and contingencies (see Note 16) Shareholders’ equity: Preferred stock, $0.0001 par value, 5,000,000 shares authorized; no shares and 4,417 sharesissued and outstanding at December 31, 2017 and 2018, respectively. — — Common stock, $0.0001 par value, 150,000,000 shares authorized; 1,181,179 shares issued andoutstanding at December 31, 2017; 4,629,174 shares issued and outstanding at December 31,2018. 118 463 Additional paid-in capital 196,545,523 223,499,634 Accumulated deficit (195,249,607) (220,457,578)Total shareholders’ equity 1,296,034 3,042,519 Total liabilities and shareholders’ equity $7,378,906 $8,750,303 The accompanying notes are an integral part of these financial statements. 81Biocept, Inc.Statements of Operations and Comprehensive Loss For the year ended December 31, 2017 2018 Net revenues $5,068,663 $3,250,298 Costs and expenses: Cost of revenues 9,345,122 10,051,735 Research and development expenses 3,364,747 4,468,572 General and administrative expenses 7,189,529 7,074,024 Sales and marketing expenses 6,343,971 5,914,706 Total costs and expenses 26,243,369 27,509,037 Loss from operations (21,174,706) (24,258,739)Other income/(expense): Interest expense, net (482,623) (310,976)Other income 51,216 — Total other income/(expense): (431,407) (310,976)Loss before income taxes (21,606,113) (24,569,715)Income tax expense (7,624) (1,886)Net loss and comprehensive loss $(21,613,737) $(24,571,601)Deemed dividend related to warrants down round provision — (636,370)Net loss attributable to common shareholders $(21,613,737) $(25,207,971)Weighted-average shares outstanding used in computing net loss per share attributable to commonshareholders: Basic 916,599 2,798,243 Diluted 916,599 2,798,243 Net loss per common share: Basic $(23.58) $(9.01)Diluted $(23.58) $(9.01) The accompanying notes are an integral part of these financial statements. 82Biocept, Inc.Statements of Shareholders’ Equity Common Stock Series AConvertiblePreferred Stock Additional Accumulated Shares Amount Shares Amount Paid-in Capital Deficit Total Balance at December 31, 2016 583,313 $58 — $— $174,294,473 $(173,635,870) $658,661 Stock-based compensation expense — — — — 1,247,481 — 1,247,481 Shares issued for restricted stock units 5,194 — — — — — — Shares issued upon exercise of common stockwarrants 227,228 23 — — 7,498,512 — 7,498,535 Shares and warrants issued for March 2017registered direct offering, net of issuance costs 144,000 15 — — 8,559,944 — 8,559,959 Shares and warrant issued for August 2017private placement, net of issuance costs 48,889 5 — — 2,023,934 — 2,023,939 Shares issued for December 2017 registereddirect offering, net of issuance costs 164,167 16 — — 2,921,180 — 2,921,196 Fractional shares issued upon one-for-thirtyreverse stock split 8,388 1 — — (1) — — Net loss — — — — — (21,613,737) (21,613,737)Balance at December 31, 2017 1,181,179 118 — — 196,545,523 (195,249,607) 1,296,034 Stock-based compensation expense — — — — 623,412 — 623,412 Shares issued for restricted stock units 5,833 1 — — (1) — — Shares issued upon exercise of pre-fundedcommon stock warrants 120,000 12 — — 1,188 — 1,200 Deemed dividends related warrants downroundprovision — — — — 636,370 (636,370) — Shares and warrants issued for January 2018financing transaction, net of issuance costs 1,095,153 110 — — 13,342,709 — 13,342,819 Shares and warrants issued for August 2018rights offering, net of issuance costs — — 11,587 1 10,097,861 — 10,097,862 Shares and warrants issued for September 2018registered direct offering, net of issuance costs 642,438 64 — — 2,252,729 — 2,252,793 Shares issued upon conversion of preferred stock 1,584,571 158 (7,170) (1) (157) — — Net loss — — — — — (24,571,601) (24,571,601)Balance at December 31, 2018 4,629,174 $463 4,417 $— $223,499,634 $(220,457,578) $3,042,519 The accompanying notes are an integral part of these financial statements. 83Biocept, Inc.Statements of Cash Flows For the year ended December 31, 2017 2018 Cash Flows from Operating Activities Net loss $(21,613,737) $(24,571,601)Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 575,717 800,905 Inventory reserve (50,532) (38,499)Stock-based compensation 1,247,481 623,412 Non-cash interest expense related to credit facility and other financing activities 45,788 29,426 Increase/(decrease) in cash resulting from changes in: Accounts receivable, net (1,064,457) (380,899)Inventory 100,875 (50,021)Prepaid expenses and other current assets 518,863 488,505 Accounts payable 349,932 601,872 Accrued liabilities 236,927 460,972 Accrued interest 78,649 (202,609)Deferred rent (76,232) (116,681)Net cash used in operating activities (19,650,726) (22,355,218)Cash Flows from Investing Activities: Purchases of fixed assets (1,400,180) (145,253)Net cash used in investing activities (1,400,180) (145,253)Cash Flows from Financing Activities: Net proceeds from issuance of common stock and warrants 13,505,094 25,693,474 Proceeds from exercise of common stock warrants 7,498,535 1,200 Net proceeds from sale-leaseback transaction 150,848 — Payments on equipment financings (166,348) (160,381)Payments on supplier and other third-party financings (465,279) (559,092)Payments on credit facility (1,934,665) (1,197,968)Net cash provided by financing activities 18,588,185 23,777,233 Net increase/(decrease) in Cash (2,462,721) 1,276,762 Cash at Beginning of Period 4,609,332 2,146,611 Cash at End of Period $2,146,611 $3,423,373 Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $358,471 $605,485 Income taxes $5,273 $4,517 The accompanying notes are an integral part of these financial statements. 84Non-cash Investing and Financing Activities:During the years ended December 31, 2017 and 2018, Biocept, Inc., or the Company, financed insurance premiums of approximately $451,000 and$488,000, respectively, through third-party financings (see Note 9). During the year ended December 31, 2018, the Company cancelled insurance premiumspreviously financed through third parties with no remaining principal balance outstanding at year end. Fixed assets purchased totaling approximately $719,000 and $279,000 during the years ended December 31, 2017 and 2018, respectively, were recorded asequipment financing obligations and were excluded from cash purchases in the Company’s statements of cash flows (see Note 8). During the year endedDecember 31, 2017, fixed assets with an aggregate net book value of approximately $34,000 were exchanged with a lender as partial payment on anoutstanding equipment financing obligation balance.The amount of unpaid fixed asset purchases excluded from cash purchases in the Company’s statements of cash flows decreased from approximately $31,000at December 31, 2017 to $25,000 at December 31, 2018. An offering of the Company’s common stock and warrants to purchase its common stock occurred on March 31, 2017 (see Note 4). In the offering, warrantswere issued to purchase up to an aggregate of 72,000 shares of common stock at an exercise price of $75.00 per share with a term of five years and anestimated aggregate grant date fair value of approximately $2.8 million, which was recorded as an offset to additional paid-in capital (see Note 5).Additionally, approximately $728,000 of fees and costs directly associated with this offering were recorded as an offset to additional paid-in capital inaccordance with applicable accounting guidance.An offering of the Company’s common stock and a warrant to purchase its common stock occurred on August 9, 2017 (see Note 4). In the offering, a warrantwas issued to purchase up to 47,821 shares of common stock at an exercise price of $45.00 per share with a term of five years and an estimated grant date fairvalue of approximately $1.5 million, which was recorded as an offset to additional paid-in capital (see Note 5). Additionally, approximately $176,000 of feesand costs directly associated with this offering were recorded as an offset to additional paid-in capital in accordance with applicable accounting guidance.An offering of the Company’s common stock and a warrant to purchase its common stock occurred on December 8, 2017 (see Note 4). In the offering, awarrant was issued to the placement agent to purchase up to 8,208 shares of common stock at an exercise price of $25.50 per share that was first exercisableon June 5, 2018 with a term of five years expiring on December 5, 2022 and an estimated grant date fair value of approximately $0.1 million, which wasrecorded as an offset to additional paid-in capital (see Note 5). Additionally, approximately $428,000 of fees and costs directly associated with this offeringwere recorded as an offset to additional paid-in capital in accordance with applicable accounting guidance.An offering of 1,095,153 shares of the Company’s common stock and warrants to purchase up to an aggregate of 1,095,153 shares of its common stock at acombined offering price of $13.50 per unit occurred on January 30, 2018. All warrants sold in this offering have an exercise price of $3.16 per share, subjectto down round adjustment, are exercisable immediately and expire five years from the date of issuance. The estimated aggregate grant date fair value of thesewarrants was approximately $9.7 million as of the closing of the Company’s January 30, 2018 offering (see Note 4). Additionally, approximately $1.4 millionof fees and costs directly associated with this offering were recorded as an offset to additional paid-in capital in accordance with applicable accountingguidance.A rights offering for the Company’s Series A preferred stock and warrants was completed on August 13, 2018. Pursuant to the rights offering the Companysold 11,587 units consisting of an aggregate of 11,587 shares of Series A Preferred Stock and 2,549,140 warrants, with each warrant exercisable for one shareof Common Stock at an exercise price of $4.53 per share. The gross amount raised in the rights offering was $11.6 million. All warrants sold in this offeringhave an exercise price of $4.53 per share, are exercisable immediately and expire five years from the date of issuance. The estimated aggregate grant date fairvalue of these warrants was approximately $8.4 million as of the closing of the rights offering (see Note 4). Additionally, approximately $1.4 million of feesand costs directly associated with this offering were recorded as an offset to additional paid-in capital in accordance with applicable accounting guidance.During the year ended December 31, 2018, 7,170 shares of Series A Preferred Stock were converted into 1,584,571 shares of common stock.85An offering of 642,438 shares of the Company’s common stock and prefunded warrants to purchase up to an aggregate of 120,000 shares of its common stockoccurred on September 20, 2018. The shares were sold at a purchase price of $3.285 per share and the pre-funded warrants were sold at a purchase price of$3.275 per pre-funded warrant which represents the per share purchase price for the shares less the $0.01 per share exercise price for each such pre-fundedwarrant. The aggregate gross proceeds from the offering were approximately $2.5 million. In addition, in a concurrent private placement, the Company issuedto purchasers a warrant to purchase one share of the Company’s common stock for each share and pre-funded warrant purchased for cash in the offering. Allwarrants issued in this offering have an exercise price of $3.16 per share, are exercisable upon the six-month anniversary of issuance and expire five yearsfrom such date. The estimated aggregate grant date fair value of these warrants was approximately $2.0 million as of the closing of the offering (see Note 4).Additionally, approximately $0.3 million of fees and costs directly associated with this offering were recorded as an offset to additional paid-in capital inaccordance with applicable accounting guidance.The issuance of warrants with an exercise price of $3.16 in the September 2018 financing transaction triggered the down round provision in the January 2018warrants, resulting in recording a deemed dividend related to the warrants down round provision in the amount of approximately $636,000 increasing the netloss attributable to common shareholders. The accompanying notes are an integral part of these financial statements. 86BIOCEPT, INC.NOTES TO FINANCIAL STATEMENTS 1. The Company and Business ActivitiesThe Company was founded in California in May 1997 and is an early stage molecular oncology diagnostics company that develops and commercializesproprietary circulating tumor cell, or CTC, and circulating tumor DNA, or ctDNA, assays utilizing a standard blood sample, or liquid biopsy. The Company’scurrent and planned assays are intended to provide information to aid healthcare providers to identify specific oncogenic alterations that may qualify asubset of cancer patients for targeted therapy at diagnosis, progression or for monitoring in order to identify specific resistance mechanisms. Sometimestraditional procedures, such as surgical tissue biopsies, result in tumor tissue that is insufficient and/or unable to provide the molecular subtype informationnecessary for clinical decisions. The Company’s assays, performed on blood, have the potential to provide more contemporaneous information on thecharacteristics of a patient’s disease when compared with tissue biopsy and radiographic imaging. Additionally, commencing in October 2017, theCompany’s pathology partnership program, Empower TC, provides the unique ability for pathologists to participate in the interpretation of liquid biopsyresults and is available to pathology practices and hospital systems throughout the United States. Further, sales to laboratory supply distributors of ourproprietary blood collection tubes, or BCTs, commenced in June 2018, which allow for the intact transport of liquid biopsy samples for research use only, orRUO, from regions around the world.The Company operates a clinical laboratory that is CLIA-certified (under the Clinical Laboratory Improvement Amendment of 1988) and CAP-accredited (bythe College of American Pathologists), and manufactures cell enrichment and extraction microfluidic channels, related equipment and certain reagents toperform the Company’s diagnostic assays in a facility located in San Diego, California. CLIA certification and accreditation are required before any clinicallaboratory may perform testing on human specimens for the purpose of obtaining information for the diagnosis, prevention, treatment of disease, orassessment of health. The assays the Company offers are classified as laboratory developed tests under the CLIA regulations.In July 2013, the Company effected a reincorporation to Delaware by merging itself with and into Biocept, Inc., a Delaware corporation, which had beenformed to be and was a wholly-owned subsidiary of the Company since July 23, 2013. 2. Liquidity and Going Concern UncertaintyAs of December 31, 2018, cash totaled $3.4 million and the Company had an accumulated deficit of $220.5 million. For the years ended December 31, 2017and 2018, the Company incurred net losses of $21.6 million and $24.6 million, respectively. At December 31, 2018, the Company had aggregate net interest-bearing indebtedness of $1.6 million of which $642,000 was due within one year, whereas at December 31, 2017, the Company had aggregate net interest-bearing indebtedness of approximately $3.1 million, of which approximately $2.0 million was due within one year, in addition to approximately $2.7million of other non-interest-bearing current liabilities. Additionally, in February 2016, the Company signed a firm, non-cancelable, and unconditionalcommitment in an aggregate amount of $1,062,500 with a vendor to purchase certain inventory items, payable in minimum quarterly amounts of $62,500through May 2020, under which approximately $341,000 remained outstanding at December 31, 2018 (see Note 16). These factors raise substantial doubtabout the Company’s ability to continue as a going concern for the one-year period following the date that these financial statements were issued. Theaccompanying financial statements and notes have been prepared assuming that the Company will continue as a going concern. The accompanying financialstatements and notes do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts andclassification of liabilities that may result from the possible inability of the Company to continue as a going concern.While the Company is currently in the commercialization stage of operations, the Company has not yet achieved profitability and anticipates that it willcontinue to incur net losses for the foreseeable future. Historically, the Company’s principal sources of cash have included proceeds from the issuance ofcommon and preferred stock, proceeds from the exercise of warrants to purchase common stock, proceeds from the issuance of debt, and revenues fromlaboratory services. The Company’s principal uses of cash have included cash used in operations, payments relating to purchases of property and equipmentand repayments of borrowings. The Company expects that the principal uses of cash in the future will be for continuing operations, hiring of sales andmarketing personnel and increased sales and marketing activities, funding of research and development, capital expenditures, and general working capitalrequirements. The Company expects that, as87revenues grow, sales and marketing and research and development expenses will continue to grow, albeit at a slower rate and, as a result, the Company willneed to generate significant growth in net revenues to achieve and sustain income from operations.In May 2015, the SEC declared effective a shelf registration statement filed by the Company, which expired in May 2018. The shelf registration statementallowed the Company to issue any combination of its common stock, preferred stock, debt securities and warrants from time to time for an aggregate initialoffering price of up to $50 million, subject to certain limitations for so long as its public float was less than $75 million. Pursuant to an exclusive placementagent agreement dated April 25, 2016 between the Company and H.C. Wainwright & Co., LLC, or Wainwright, and a securities purchase agreement datedApril 29, 2016 between the Company and the purchasers’ signatory thereto, the Company received approximately $4.3 million of net cash proceeds upon thesale of its common stock and warrants to purchase its common stock. Subsequent to the closing of this offering on May 4, 2016, no warrants sold in thisoffering have been exercised, with approximately $4.5 million in gross warrant proceeds remaining outstanding and available to be exercised at $117.00 pershare until their expiration in May 2021. Pursuant to an exclusive placement agent agreement dated March 28, 2017 between the Company and Roth CapitalPartners, LLC as lead placement agent, and WestPark Capital and Chardan Capital as co-placement agents, a securities purchase agreement for an offering of144,000 shares of the Company’s common stock was effected under this registration statement at a per share price of $64.50. In a concurrent privateplacement, the Company sold unregistered warrants to purchase up to an aggregate of 72,000 shares of its common stock that closed concurrently with theoffering common stock sold pursuant to this shelf registration statement, of which none have been subsequently exercised. All warrants sold in this offeringhave a per share exercise price of $75.00 and expire on October 1, 2022. The closing of the sale of these securities to the purchasers occurred on March 31,2017, when the Company received approximately $8.6 million of net cash proceeds. Pursuant to an exclusive placement agent agreement dated December 5,2017 between the Company and Dawson James Securities, Inc. as lead placement agent, and WestPark Capital as co-placement agent, a securities purchaseagreement for a registered direct offering of 164,166 shares of the Company’s common stock was effected under this registration statement at a per share priceof $20.40. The placement agent was issued a warrant to purchase 8,208 shares of common stock at an exercise price of $25.50 per share, which was firstexercisable on June 5, 2018 and expires on December 5, 2022. The closing of the sale of these securities occurred on December 8, 2017, when the Companyreceived approximately $2.9 million of net cash proceeds.Pursuant to a common stock and warrant purchase agreement dated August 9, 2017, the Company received net cash proceeds of approximately $2.0 millionas a result of the sale of its common stock and warrants. Subsequent to the closing of this offering, no additional cash proceeds have been received from theexercise of warrants sold in this offering, with approximately $2.2 million in gross warrant proceeds remaining outstanding and available to be exercised at$45.00 per share until their expiration in August 2022.On January 30, 2018, the Company received net cash proceeds of approximately $13.3 million as a result of the closing of a follow-on public offering.Subsequent to the closing of this offering, no additional cash proceeds have been received from the exercise of warrants sold in this offering, withapproximately $16.4 million in gross warrant proceeds remaining outstanding and available to be exercised at $3.16 per share, subject to down roundadjustment, until their expiration in January 2023.In May 2018, the SEC declared effective a shelf registration statement filed by the Company, which expires in May 2021. The shelf registration statementallows the Company to issue any combination of its common stock, preferred stock, debt securities and warrants from time to time for an aggregate initialoffering price of up to $50 million, subject to certain limitations for so long as its public float is less than $75 million. On August 13, 2018, the Company completed a rights offering pursuant to an effective registration statement. Pursuant to the rights offering, the Companysold an aggregate of 11,587 units consisting of an aggregate of 11,587 shares of Series A Preferred Stock and 2,549,140 warrants, with each warrantexercisable for one share of its common stock at an exercise price of $4.53 per share, resulting in net proceeds to the Company of approximately $10.1million, after deducting expenses relating to the rights offering, including dealer-manager fees and expenses, and excluding any proceeds received uponexercise of any warrants.On September 20, 2018, the Company completed an offering of 642,438 shares of the Company’s common stock and pre-funded warrants to purchase up toan aggregate of 120,000 shares of its common stock. The shares were sold at a purchase price of $3.285 per share and the pre-funded warrants were sold at apurchase price of $3.275 per pre-funded warrant which88represents the per share purchase price for the shares less the $0.01 per share exercise price for each such pre-funded warrant. The net proceeds to theCompany from the offering were approximately $2.2 million, after deducting expenses related to the offering including dealer-manager fees and expenses,and excluding any proceeds received upon exercise of any warrants. In addition, in a concurrent private placement, the Company issued to purchasers awarrant to purchase one share of the Company’s common stock for each share and pre-funded warrant purchased for cash in the offering. All warrants issued inthis offering initially had an exercise price of $3.16 per share, are exercisable upon the six-month anniversary of issuance and expire five years from suchdate. On January 18, 2019, the Company completed an offering of 990,000 shares of the Company’s common stock pursuant to a shelf-registration on Form S-3that became effective in May 2018. The shares were sold at a purchase price of $2.25 per share and the net proceeds to the Company from this offering wereapproximately $2.0 million, after deducting expenses related to the offering including dealer-manager fees and expenses.On February 12, 2019, the Company received net cash proceeds of approximately $6.8 million as a result of the closing of a follow-on public offering of6,250,000 shares of its common stock and warrants to purchase up to an aggregate of 6,250,000 shares of its common stock at a combined offering price of$1.20 per unit. All warrants sold in this offering have an exercise price of $1.20 per share, are exercisable immediately and expire five years from the date ofissuance. In addition, the Company granted warrants to purchase up to an aggregate of 937,500 shares of the Company’s common stock in connection withthe partial exercise of the over-allotment option granted to the underwriters. Subsequent to the closing of this offering, no additional cash proceeds have beenreceived from the exercise of warrants sold in this offering. On March 11, 2019, the underwriters exercised their overallotment option for 538,867 shares ofthe Company’s common stock related to the February 12, 2019 follow-on offering, purchasing shares at $1.20 for net cash proceeds of approximately$601,000.On March 19, 2019, the Company received net cash proceeds of approximately $7.5 million as a result of completing a registered direct offering of 5,950,000shares at a negotiated purchase price of $1.37 per share. In addition, in a concurrent private placement, the Company issued to purchasers a warrant topurchase one share of the Company’s common stock for each share purchased for cash in the offering. All warrants issued in this offering have an exerciseprice of $1.25 per share, are exercisable immediately upon issuance and expire 5.5 years following the date of issuance.Management’s Plan to Continue as a Going ConcernIn order to continue as a going concern, the Company will need, among other things, additional capital resources. Until the Company can generatesignificant cash from operations, including assay revenues, management’s plans to obtain such resources for the Company include proceeds from offerings ofthe Company’s equity securities or debt, or transactions involving product development, technology licensing or collaboration. Management can provide noassurances that any sources of a sufficient amount of financing will be available to the Company on favorable terms, if at all. 3. Summary of Significant Accounting PoliciesBasis of PresentationThe accompanying financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America,or U.S. GAAP, and are prepared on the basis that the Company will continue as a going concern (see Note 2). The accompanying financial statements andnotes do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classificationof liabilities that may result from the possible inability of the Company to continue as a going concern. On July 6, 2018, the Company’s stockholders approved, and the Company filed, an amendment to the Company’s Certificate of Amendment of Certificate ofIncorporation to effect a one-for-thirty reverse stock split of the Company’s outstanding common stock. As such, all references to share and per share amountsin these financial statements and accompanying notes have been retroactively restated to reflect the one-for-thirty reverse stock split, except for theauthorized number of shares of the Company’s common stock of 150,000,000 shares, which was not affected by the one-for-thirty reverse stock split.89Going ConcernThe Company assesses and determines its ability to continue as a going concern in accordance with the provisions of ASC Topic 205-40, Presentation ofFinancial Statements—Going Concern, which requires the Company to evaluate whether there are conditions or events that raise substantial doubt about itsability to continue as a going concern within one year after the date that its annual and interim financial statements are issued (see Note 2). Certain additionalfinancial statement disclosures are required if such conditions or events are identified. If and when an entity’s liquidation becomes imminent, financialstatements should be prepared under the liquidation basis of accounting. Determining the extent, if any, to which conditions or events raise substantial doubtabout the Company’s ability to continue as a going concern, or the extent to which mitigating plans sufficiently alleviate any such substantial doubt, as wellas whether or not liquidation is imminent, requires significant judgment by management.Use of EstimatesThe preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reportingperiod. On an ongoing basis, management evaluates these estimates and judgments, including those related to accounts receivable, inventories, long-livedassets, income taxes, revenues, stock-based compensation, and the determination of the Company’s ability to continue as a going concern. The Companybases its estimates on various assumptions that it believes are reasonable under the circumstances. Actual results may differ from these estimates underdifferent assumptions or conditions.Revenue Recognition and Accounts ReceivableThe Company's commercial revenues are generated from diagnostic services provided to patient’s physicians and billed to third-party insurance payers suchas managed care organizations, Medicare and Medicaid and patients for any deductibles, coinsurance or copayments that may be due. Commencing onMarch 31, 2017, the Company began to recognize commercial revenue related to billings for assays delivered and billed to Medicare and other third-partypayers on an accrual basis when amounts that will ultimately be realized can be estimated upon delivery, whereby prior to March 31, 2017, the Companyrecognized revenues for its commercial diagnostic services on a cash basis as collected because the amounts ultimately expected to be received could not beestimated upon delivery due to insufficient collection history experience. Commencing on January 1, 2018, the Company recognizes revenue in accordancewith ASC 606, Revenue from Contracts with Customers, or ASC 606, which requires that an entity recognize revenue when it transfers promised goods orservices to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. TheCompany adopted the provisions of ASC 606 using the modified retrospective application method applied to all contracts, which did not impact amountspreviously reported by the Company, nor did it require a cumulative effect adjustment upon adoption, as the Company’s method of recognizing revenueunder ASC 606 was analogous to the method utilized immediately prior to adoption. Accordingly, there is no need for the Company to disclose the amountby which each financial statement line item was affected as a result of applying the new standard and an explanation of significant changes.ContractsFor its commercial revenues, while the Company markets directly to physicians, its customer is the patient. Patients do not enter into direct agreements withthe Company that commit either them to pay any portion of the cost of the tests if they have not met their annual deductible limit under their insurancepolicy, if any, or if their insurance otherwise declines to reimburse the Company. Accordingly, the Company establishes a contract with a commercial patientin accordance with other customary business practices, as follows: •Approval of a contract is established via the order and accession, which are submitted by the patient’s physician. •The Company is obligated to perform its diagnostic services upon receipt of a sample from a physician, and the patient and/or applicablepayer are obligated to reimburse the Company for services rendered based on the patient’s insurance benefits. •Payment terms are a function of a patient’s existing insurance benefits, including the impact of coverage decisions with CMS and applicablereimbursement contracts established between the Company and payers,90 unless the patient is a self-pay patient, whereby the Company bills the patient directly after the services are provided. •Once the Company delivers a patient’s assay result to the ordering physician, the contract with a patient has commercial substance, as theCompany is legally able to collect payment and bill an insurer and/or patient, regardless of payer contract status or patient insurance benefitstatus. •Consideration associated with commercial revenues is considered variable and constrained until fully adjudicated, with net revenues recordedto the extent that it is probable that a significant reversal will not occur.The Company’s development services revenues are supported by contractual agreements and generated from assay development services provided to entities,as well as certain other diagnostic services provided to physicians, and revenues are recognized upon delivery of the performance obligations in the contract.Performance ObligationsA performance obligation is a promise in a contract to transfer a distinct good or service, or a bundle of goods or services, to the customer. For its commercialand development services revenues, the Company’s contracts have a single performance obligation, which is satisfied upon rendering of services, whichculminates in the delivery of a patient’s assay result(s) to the ordering physician or entity. The duration of time between accession receipt and delivery of avalid assay result to the ordering physician or entity is typically less than two weeks. Accordingly, the Company elected the practical expedient andtherefore, does not disclose the value of unsatisfied performance obligations.Transaction PriceThe transaction price is the amount of consideration that the Company expects to collect in exchange for transferring promised goods or services to acustomer, excluding amounts collected on behalf of third parties, such as sales taxes. The consideration expected from a contract with a customer mayinclude fixed amounts, variable amounts, or both. The Company’s gross commercial revenues billed, and corresponding gross accounts receivable, aresubject to estimated deductions for such allowances and reserves to arrive at reported net revenues, which relate to differences between amounts billed andcorresponding amounts estimated to be subsequently collected and is deemed to be variable although the variability is not explicitly stated in any contract.Rather, the implied variability is due to several factors, such as the payment history or lack thereof for third-party payers, reimbursement rate changes forcontracted and non-contracted payers, any patient co-payments, deductibles or compliance incentives, the existence of secondary payers and claimdenials. The Company estimates the amount of variable consideration using the most likely amount approach to estimating variable consideration for third-party payers, including direct patient bills, whereby the estimated reimbursement for services are established by payment histories on CPT codes for eachpayer, or similar payer types. When no payment history is available, the value of the account is estimated at Medicare rates, with additional other payer-specific reserves taken as appropriate. Collection periods for billings on commercial revenues range from less than 30 days to several months, depending onthe contracted or non-contracted nature of the payer, among other variables. The estimates of amounts that will ultimately be realized from commercialdiagnostic services for non-contracted payers require significant judgment by management.The Company limits the amount of variable consideration included in the transaction price to the unconstrained portion of such consideration. Revenue isrecognized up to the amount of variable consideration that is not subject to a significant reversal until additional information is obtained or the uncertaintyassociated with the additional payments or refunds is subsequently resolved. Differences between original estimates and subsequent revisions, including finalsettlements, represent changes in the estimate of variable consideration and are included in the period in which such revisions are made. The Companymonitors its estimates of transaction price to depict conditions that exist at each reporting date. If the Company subsequently determines that it will collectmore consideration than it originally estimated for a contract with a customer, it will account for the change as an increase in the estimate of the transactionprice in the period identified as an increase to revenue. Similarly, if the Company subsequently determines that the amount it expects to collect from acustomer is less than it originally estimated, it will generally account for the change as a decrease in the estimate of the transaction price as a decrease torevenue, provided that such downward adjustment does not result in a significant reversal of cumulative revenue recognized. Revenue recognized fromchanges in transaction prices was not significant during the year ended December 31, 2018.91Allocate Transaction PriceFor the Company’s commercial revenues, the entire transaction price is allocated to the single performance obligation contained in a contract with acustomer. For the Company’s development services revenues, the contracted transaction price is allocated to each single performance obligation contained ina contract with a customer as performed.Point-in-time RecognitionThe Company’s single performance obligation is satisfied at a point in time, and that point in time is defined as the date a patient’s successful assay result isdelivered to the patient’s ordering physician or entity. The Company considers this date to be the time at which the patient obtains control of the promiseddiagnostic assay service. Contract BalancesThe timing of revenue recognition, billings and cash collections results in accounts receivable recorded in the Company’s condensed balancesheets. Generally, billing occurs subsequent to delivery of a patient’s test result to the ordering physician or entity, resulting in an account receivable. Practical ExpedientsThe Company does not adjust the transaction price for the effects of a significant financing component, as at contract inception, the Company expects thecollection cycle to be one year or less.The Company expenses sales commissions when incurred because the amortization period is one year or less, which are recorded within sales and marketingexpenses. The Company incurs certain other costs that are incurred regardless of whether a contract is obtained. Such costs are primarily related to legal services andpatient communications. These costs are expensed as incurred and recorded within general and administrative expenses. Disaggregation of Revenue and Concentration of RiskThe composition of the Company’s net revenues recognized during the years ended December 31, 2017 and 2018, disaggregated by source and nature, are asfollows: For the year ended December 31, 2017 2018 Net revenues from contracted payers* $2,074,596 $1,348,383 Net revenues from non-contracted payers 2,721,717 1,703,179 Development services revenues 272,350 198,736 Total net revenues $5,068,663 $3,250,298 *Includes Medicare and Medicare Advantage, as reimbursement amounts are fixed and miscellaneous income from CEE-Sure blood collection tubes. For the year ended December 31, 2017 2018 Net commercial revenues recognized upon delivery $3,570,337 $3,051,562 Development services revenues recognized upon delivery 272,350 198,736 Commercial revenues recognized upon cash collection 1,225,976 — Total net revenues $5,068,663 $3,250,298 The amount of nonrecurring net revenue recorded during the year ended December 31, 2017, had the Company commenced recognizing revenue forcommercial diagnostic services upon delivery on or prior to December 31, 2016 instead of on March 31, 2017, was $843,000, and the corresponding decreasein net loss per common share was $0.90. The incremental net revenue and decrease in loss from operations as a result of recognizing revenue on an accrualbasis commencing on March 31,922017, or the total amount of net revenue recorded in excess of the amount of commercial cash collections, was $1,139,000 during the year ended December31, 2017, and the corresponding decrease in net loss per common share was $1.20, respectively. For the year ended December 31, 2018 all revenues wererecognized on an accrual basis.Concentrations of credit risk with respect to revenues are primarily limited to geographies to which the Company provides a significant volume of itsservices, and to specific third-party payers of the Company’s services such as Medicare, insurance companies, and other third-party payers. The Company’sclient base consists of many geographically dispersed clients diversified across various customer types.The composition of the Company’s gross and net revenues recognized during the years ended December 31, 2017 and 2018 is as follows: For the year ended December 31, 2017 2018 Commercial revenues recognized upon delivery $15,685,069 $12,505,149 Development services revenues recognized upon delivery 272,350 198,736 Commercial revenues recognized upon cash collection 1,225,976 — Total gross revenues 17,183,395 12,703,885 Provisions for contractual discounts (5,805,787) (3,937,993)Provisions for aged non-patient receivables (735,709) (326,137)Provisions for estimated patient receivables (169,479) (66,470)Provisions for other payer-specific sales allowances (5,403,757) (5,122,987)Net revenues $5,068,663 $3,250,298 A summary of activity in the Company’s gross and net accounts receivable balances, as well as corresponding reserves, during the year ended December 31,2018 is as follows: Balance at Amounts Settlements Balance at December 31, Recognized Upon December 31, 2017 Upon Delivery Adjudication 2018 Accounts receivable, gross $6,937,063 $12,835,371 $(11,889,832) $7,882,602 Reserve for contractual discounts (1,974,849) (3,214,615) 3,011,989 (2,177,475)Reserve for aged non-patient receivables (452,088) (994,542) 880,682 (565,948)Reserve for estimated patient receivables (88,120) (135,955) 208,598 (15,477)Reserve for other payer-specific sales allowances (3,228,580) (5,239,961) 4,919,164 (3,549,377)Accounts receivable, net $1,193,426 $3,250,298 $(2,869,399) $1,574,325 CashThe Company places its cash with reputable financial institutions that are insured by the Federal Deposit Insurance Corporation, or FDIC. At times, depositsheld may exceed the amount of insurance provided by the FDIC. The Company has not experienced any losses in its cash and believes they are not exposedto any significant credit risk.Fair Value MeasurementsThe Company uses a three-tier fair value hierarchy to prioritize the inputs used in the Company’s fair value measurements. These tiers include: Level 1,defined as observable inputs such as quoted prices in active markets for identical assets; Level 2, defined as inputs other than quoted prices in active marketsthat are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring anentity to develop its own assumptions. The Company believes the carrying amount of cash, accounts receivable, accounts payable and accrued expensesapproximate their estimated fair values due to the short-term maturities of these financial instruments. See Note 5 for further details about the inputs andassumptions used to determine fair value measurements.93Concentration of RiskFinancial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments.Concentrations of credit risk with respect to revenues are primarily limited to geographies to which the Company provides a significant volume of itsservices, and to specific third-party payers of the Company’s services such as Medicare, insurance companies, and other third-party payers. The Company’sclient base consists of a large number of geographically dispersed clients diversified across various customer types.The Company's third-party payers that represent more than 10% of total net revenues in any period presented, as well as their related net revenue amount as apercentage of total net revenues, during the years ended December 31, 2017 and 2018 were as follows: For the year ended December 31, 2017 2018 Medicare and Medicare Advantage 39% 39%Blue Cross Blue Shield 19% 11%United Healthcare 12% 17% The Company's third-party payers that represent more than 10% of total net accounts receivable, and their related net accounts receivable balance as apercentage of total net accounts receivable, at December 31, 2017 and 2018 were as follows: For the year ended December 31, 2017 2018 Blue Cross Blue Shield 27% 22%Medicare and Medicare Advantage 21% 17%United Healthcare 15% 15% The Company operates in one reportable business segment and historically has derived most revenues only from within the United States.Certain components used in the Company’s current or planned products are currently sourced from one supplier, for which alternative suppliers exist but theCompany has not validated the product(s) of such alternative supplier(s), and substitutes for these components may not be obtained easily or may requiresubstantial design or manufacturing modifications.InventoriesInventories are valued at the lower of cost or net realizable value. Cost is determined by the average cost method. The Company records adjustments to itsinventory for estimated obsolescence or diminution in net realizable value equal to the difference between the cost of the inventory and the estimated netrealizable value. At the point of loss recognition, a new cost basis for that inventory is established, and subsequent changes in facts and circumstances do notresult in the restoration or increase in that newly established cost basis. In addition, the Company records a liability for firm, non-cancelable, andunconditional purchase commitments with contract manufacturers and suppliers for quantities in excess of the Company’s future demand forecasts consistentwith its valuation of excess and obsolete inventory.Fixed AssetsFixed assets consist of machinery and equipment, furniture and fixtures, computer equipment and software, leasehold improvements, financed equipment andconstruction in-process. Fixed assets are stated at cost less accumulated depreciation and amortization. Additions, improvements, and major renewals arecapitalized. Maintenance, repairs, and minor renewals are expensed as incurred. Depreciation and amortization are recorded using the straight-line methodover the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized over the life of the lease or theasset, whichever is shorter. Depreciation and amortization expense for the years ended December 31, 2017 and 2018 was approximately $576,000 and$801,000, respectively.94Upon sale or disposal of fixed assets, the accounts are relieved of the cost and the related accumulated depreciation or amortization with any gain or lossrecorded to the statement of operations and comprehensive loss.Fixed assets are reviewed for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Thesecomputations utilize judgments and assumptions inherent in the estimates of future cash flows to determine recoverability of these assets. If the assumptionsabout these assets were to change as a result of events or circumstances, the Company may be required to record an impairment loss.Stock-based CompensationThe Company measures and recognizes compensation expense for all stock-based awards made to employees and directors based on their grant date fairvalues. The Company estimates the fair value of stock option awards on the date of grant using the Black-Scholes option pricing model, while the fair valueof restricted stock unit awards, or RSUs, is determined by the Company’s stock price on the date of grant. The value of the portion of the award that isultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. In addition, the Company estimatesforfeitures at the time of grant and revises these estimates in subsequent periods if actual forfeitures differ from those estimates (see Note 10).The Company determines the fair value of the stock-based compensation awards granted as either the fair value of the consideration received, or the fair valueof the equity instruments issued, whichever is more reliably measurable. All issuances of equity instruments issued to non-employees as consideration forgoods or services received by the Company are accounted for based on the fair value of the equity instruments issued. These awards are recorded in expenseand additional paid-in capital in shareholders’ equity over the applicable service periods based on the fair value of the options at the end of each period.Calculating the fair value of stock-based awards requires the input of highly subjective assumptions into the Black-Scholes valuation model. Stock-basedcompensation expense is calculated using the Company’s best estimates, which involves inherent uncertainties, and the application of management’sjudgment. Significant estimates include the expected life of the stock option, stock price volatility and risk-free interest rate.Research and DevelopmentResearch and development costs are expensed as incurred. The amounts expensed in the years ended December 31, 2017 and 2018 were approximately$3,365,000 and $4,469,000, respectively, which includes salaries of research and development personnel.Income TaxesThe Company provides for income taxes utilizing the liability method. Under the liability method, current income tax expense or benefit is the amount ofincome taxes expected to be payable or refundable for the current year. A deferred income tax asset or liability is computed for the expected future impact ofdifferences between the financial reporting and tax bases of assets and liabilities and for the expected future tax benefit to be derived from tax credits. Taxrate changes are reflected in the computation of the income tax provision during the period such changes are enacted.Deferred tax assets are reduced by a valuation allowance when, in management’s opinion, it is more likely than not that some portion or all of the deferred taxassets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planningstrategies in making this assessment. The Company’s valuation allowance is based on available evidence, including its current year operating loss,evaluation of positive and negative evidence with respect to certain specific deferred tax assets including evaluation sources of future taxable income tosupport the realization of the deferred tax assets. The Company has established a full valuation allowance on the deferred tax assets as of December 31, 2017and 2018, and therefore has not recognized any income tax benefit or expense in the periods presented.95A tax benefit from uncertain tax positions may be recognized by the Company when it is more-likely-than-not that the position will be sustained uponexamination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. Income tax positions mustmeet a more-likely-than-not recognition threshold to be recognized.The Company recognizes interest and/or penalties related to income tax matters in income tax expense. There is no accrual for interest or penalties for incometaxes on the balance sheets at December 31, 2017 and 2018, and the Company has not recognized interest and/or penalties in the statements of operationsand comprehensive loss for the years ended December 31, 2017 and 2018.Recent Accounting PronouncementsIn January 2016, the FASB issued authoritative guidance requiring, among other things, that certain equity investments be measured at fair value withchanges in fair value recognized in net income, that financial assets and financial liabilities be presented separately by measurement category and form offinancial asset on the balance sheet or the accompanying notes to the financial statements, that the prior requirement to disclose the method(s) and significantassumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet beeliminated, and that a reporting organization is to present separately in other comprehensive income the portion of the total change in the fair value of aliability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordancewith the fair value option for financial instruments. This guidance is effective for fiscal years, and interim periods within those years, beginning afterDecember 15, 2017. Early adoption of the instrument-specific credit risk amendment is permitted. The Company adopted this guidance for the fiscal yearbeginning on January 1, 2018, which did not have a material impact on its financial statements or disclosures. In February 2016, the FASB issued authoritative guidance, which changes several aspects of the accounting for leases, including the requirement that allleases with durations greater than twelve months be recognized on the balance sheet. The guidance is effective for annual and interim reporting periods infiscal years beginning after December 15, 2018. Although the Company is in the process of finalizing the impact of adoption of the ASU on its financialstatements, the Company will elect the optional transition method to account for the impact of the adoption with a cumulative-effect adjustment in the periodof adoption and will not restate prior periods. The Company expects to elect certain practical expedients permitted under the transition guidance. TheCompany will record a right-of-use asset and liability upon adoption of the guidance. The Company is currently finalizing its review of contracts and mayidentify additional embedded leases and additional amounts to be recorded.In August 2016, the FASB issued authoritative guidance clarifying the classification of certain cash receipts and cash payments in the statement of cashflows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, on a retrospectivetransition method to each period presented. Early adoption is permitted. The Company adopted this guidance for the reporting period beginning January 1,2018, which did not have a material impact on its financial statements or disclosures.In January 2017, the FASB issued authoritative guidance clarifying the definition of a business when evaluating transactions involving acquisitions ordisposals of assets or businesses. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscalyears. Certain applications of this guidance are permitted for early adoption. The Company adopted this guidance for the reporting period beginning January1, 2018, which did not have a material impact on its financial statements or disclosures.In July 2017, the FASB issued authoritative guidance changing the classification analysis of certain equity-linked financial instruments (or embeddedfeatures) with down round features, whereby a down round feature no longer precludes equity classification when assessing whether the instrument is indexedto an entity’s own stock, and also clarifying existing disclosure requirements for equity-classified instruments. This guidance is effective for fiscal yearsbeginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Companyearly adopted this guidance for the fiscal year beginning on January 1, 2018, which did not have a material impact on its financial statements or disclosuresupon adoption, but did result in equity classification for the warrants issued on January 30, 2018, whereby liability classification may have occurred in theabsence of the adoption of this guidance due to the existence of a down round feature associated with the exercise price of the warrants, which would haveresulted in material impacts to the Company’s financial statements and disclosures.96In August 2017, the FASB issued authoritative guidance that expands and refines hedge accounting for both nonfinancial and financial risk components andalign the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This guidance is effective forfiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted. The Company adopted thisguidance for the fiscal year beginning on January 1, 2019 and determined that the adoption of this guidance not will have a material impact on its financialstatements or disclosures because the Company does not currently hold any financial instruments accounted for as a hedging activity.In February 2018, the FASB issued authoritative guidance allowing a reclassification from accumulated other comprehensive income to retained earnings forstranded tax effects resulting from a tax bill, “H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on theBudget for Fiscal Year 2018,” or the Tax Cuts and Jobs Act, enacted on December 22, 2017. These amendments eliminate the stranded tax effects resultingfrom the Tax Cuts and Jobs Act. However, because these amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act,the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. Thisguidance also requires certain disclosures about stranded tax effects. This guidance is effective for fiscal years beginning after December 15, 2018, andinterim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance for the fiscal year beginning on January 1, 2019and determined that the adoption of this guidance will not have a material impact on its financial statements or disclosures because the Company does notcurrently maintain any stranded tax effects in accumulated other comprehensive income.In February 2018, the FASB issued authoritative guidance concerning certain fair value option liabilities, equity securities without a readily determinablefair value, and certain equity investments. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within thosefiscal years beginning after June 15, 2018. Public entities with fiscal years beginning between December 15, 2017 and June 15, 2018 are not required toadopt these amendments until the interim period beginning after June 15, 2018. The Company adopted this guidance for the interim period beginning onJuly 1, 2018, which did not have a material impact on its financial statements or disclosures because the Company did not hold any fair value optionliabilities, equity securities without a readily determinable fair value, or equity investments. In June 2018, the FASB issued authoritative guidance simplifying the accounting for nonemployee stock-based compensation and largely aligning suchcompensation with the accounting requirements for employee stock-based awards. For public companies, this guidance is effective for fiscal years beginningafter December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than an entity’s adoption date ofguidance on Revenue from Contracts with Customers (Topic 606). The Company adopted this guidance for the fiscal year beginning on January 1, 2019 anddetermined that the adoption of this guidance will not have a material impact on its financial statements or disclosures.In November 2018, the FASB issued authoritative guidance clarifying the interaction between Collaborative Arrangements (Topic 808) and Revenue fromContracts with Customers (Topic 606) to address diversity in practice related to how companies account for collaborative arrangements. For publiccompanies, this guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. Early adoption ispermitted, but no earlier than an entity’s adoption date of Revenue from Contracts with Customers (Topic 606). The Company currently intends to adopt thisguidance upon the effective date and does not anticipate that the adoption of this guidance will have a material impact on its financial statements ordisclosures. 4. Sales of Equity Securities In May 2015, the SEC declared effective a shelf registration statement filed by the Company, which expired on May 21, 2018. The shelf registrationstatement allowed the Company to issue any combination of its common stock, preferred stock, debt securities and warrants from time to time for anaggregate initial offering price of up to $50 million, subject to certain limitations for so long as the Company’s public float was less than $75 million.Pursuant to an exclusive placement agent agreement dated March 28, 2017 between the Company and Roth Capital Partners, LLC as lead placement agent,and WestPark Capital and Chardan Capital as co-placement agents, a securities purchase agreement for an offering of 144,000 shares of the Company’scommon stock was effected under this registration statement at a per share price of $64.50, which closed on March 31, 2017. In a concurrent privateplacement, the Company sold unregistered warrants to purchase up to an aggregate of 72,000 shares of the Company’s common stock that closedconcurrently with the March 2017 offering of common stock sold pursuant the shelf registration statement, of which none have been subsequently exercised.All warrants97sold in this offering have a per share exercise price of $75.00 and expire on October 1, 2022. The estimated grant date fair value of these warrants ofapproximately $2.8 million was recorded as an offset to additional paid-in capital upon the closing of this offering (see Note 5). At the closing of these saleson March 31, 2017, the Company received, approximately $8.6 million after deducting $0.7 million of costs directly associated with the offering that wererecorded as an offset to additional paid-in capital under applicable accounting guidance . Pursuant to an exclusive placement agent agreement datedDecember 5, 2017 between the Company and Dawson James Securities, Inc. as lead placement agent, and WestPark Capital as co-placement agent, asecurities purchase agreement for a registered direct offering of 164,166 shares of the Company’s common stock was effected under this registration statementat a per share price of $20.40. The placement agent was issued a warrant to purchase 8,208 shares of common stock at an exercise price of $25.50 per sharewith an estimated grant date fair value of $0.1 million, which expires on December 5, 2022. The closing of the sale of these securities occurred onDecember 8, 2017, when the Company received approximately $2.9 million of net cash proceeds after deducting $0.4 million costs directly associated withthe offering that were recorded as an offset to additional paid-in-capital under applicable accounting guidance.Pursuant to a common stock and warrant purchase agreement dated August 9, 2017 between the Company and Ally Bridge LB Healthcare Master FundLimited, or Ally Bridge, an offering of 48,888 shares of the Company’s common stock and warrants to purchase up to an aggregate of 47,821 shares ofcommon stock was effected at a combined offering price of $45.00 per unit for total gross proceeds to the Company of $2.2 million. All warrants sold in thisoffering have a per share exercise price of $45.00, are exercisable immediately and expire five years from the date of issuance. The estimated grant date fairvalue of this warrant of approximately $1.5 million was recorded as an offset to additional paid-in capital upon the closing of this offering (see Note 5).Subsequent to the closing of this offering, no additional cash proceeds had been received from the exercise of warrants sold in this offering. As such, the totalincrease in capital as a result of the sale of the common stock and warrants has been approximately $2.0 million after deducting $0.2 million of associatedcosts incurred, which were offset against these proceeds under applicable accounting guidance.On January 30, 2018, the Company received net cash proceeds of approximately $13.3 million as a result of the closing of a follow-on public offering of1,095,153 shares of its common stock and warrants to purchase up to an aggregate of 1,095,153 shares of its common stock at a combined offering price of$13.50 per unit with $1.4 million of costs directly associated with the offering recorded as an offset to additional paid-in capital under applicable accountingguidance. All warrants sold in this offering have an exercise price of $3.16 per share, which is subject to down round adjustment, an aggregate estimatedgrant date fair value of $9.7 million (see Note 4) and expire five years from the date of issuance. Subsequent to the closing of this offering, no additional cashproceeds have been received from the exercise of warrants sold in this offering.In May 2018, the SEC declared effective a shelf registration statement filed by the Company, which expires in May 2021. The shelf registration statementallows the Company to issue any combination of our common stock, preferred stock, debt securities and warrants from time to time for an aggregate initialoffering price of up to $50 million, subject to certain limitations for so long as our public float is less than $75 million. On August 13, 2018, the Company completed a rights offering. Pursuant to the rights offering, the Company sold an aggregate of 11,587 units consisting ofan aggregate of 11,587 shares of Series A Preferred Stock and 2,549,140 warrants, with each warrant exercisable for one share of our common stock at anexercise price of $4.53 per share, resulting in net proceeds to the Company of approximately $10.1 million, after deducting expenses relating to the rightsoffering, including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants. Each share of Series A PreferredStock will be convertible, at the Company’s option at any time on or after the first anniversary of the closing of the Rights Offering or at the option of theholder at any time, into the number of shares of the Company’s common stock, par value $0.0001 per share determined by dividing the $1,000 stated valueper share of the Series A Preferred Stock by a conversion price of $4.53 per share. In addition, the conversion price per share is subject to adjustment for stockdividends, distributions, subdivisions, combinations or reclassifications. Holders of Series A Preferred Stock shall be entitled to receive dividends (on an as-if-converted-to-common-stock basis) in the same form as dividends actually paid on shares of the Common Stock when, as and if such dividends are paid onshares of Common Stock. The Series A Preferred Stock have no voting rights. Upon the Company’s liquidation, dissolution or winding-up, whether voluntaryor involuntary, holders of Series A Preferred Stock will be entitled to receive out of the assets, whether capital or surplus, of the Company the same amountthat a holder of Common Stock would receive if the Series A Preferred Stock were fully converted (disregarding for such purpose any conversion limitationsthereunder) to Common Stock, which amounts shall be paid pari passu with all holders of Common Stock. The Company is not obligated to redeem orrepurchase any shares of Series A Preferred Stock.98 On September 20, 2018, the Company completed an offering of 642,438 shares of the Company’s common stock and prefunded warrants to purchase up to anaggregate of 120,000 shares of its common stock. The shares were sold at a purchase price of $3.285 per share and the pre-funded warrants were sold at apurchase price of $3.275 per pre-funded warrant which represents the per share purchase price for the shares less the $0.01 per share exercise price for eachsuch pre-funded warrant. The net proceeds to the Company from this offering were approximately $2.2 million, after deducting expenses related to theoffering including dealer-manager fees and expenses, and excluding any proceeds received upon exercise of any warrants. In addition, in a concurrent privateplacement, the Company issued to purchasers a warrant to purchase one share of the Company’s common stock for each share and pre-funded warrantpurchased for cash in the offering. All warrants issued in this offering have an exercise price of $3.16 per share, are exercisable upon the six-monthanniversary of issuance and expire five years from such date. 5. Fair Value MeasurementsThe estimated nonrecurring fair value measurements associated with fixed asset purchases recorded as equipment financing obligations totalingapproximately $719,000 and $279,000 during the years ended December 31, 2017 and 2018, respectively, were based on information provided by vendors,which involved the use of significant unobservable Level 3 inputs.The estimated fair value of the terms of the credit facility entered into with Oxford Finance LLC in April 2014, or the April 2014 Credit Facility, at December31, 2017 and 2018 approximated its carrying value, which was determined using a discounted cash flow analysis. The analysis considered interest rates ofinstruments with similar maturity dates, which involved the use of significant unobservable Level 3 inputs.Other Fair Value Measurement As of the closing of the Company’s March 31, 2017 offering, the estimated grant date fair value of $39.30 per share associated with the warrants to purchaseup to 72,000 shares of common stock issued in this offering, or a total of approximately $2.8 million, was recorded as an offset to additional paid-in capital,and was estimated using a Black-Scholes valuation model with the following assumptions: Stock price$63.90 Exercise price$75.00 Expected dividend yield 0.00%Discount rate-bond equivalent yield 1.93%Expected life (in years) 5.00 Expected volatility 80.0%As of the closing of the Company’s August 9, 2017 offering, the estimated grant date fair value of $30.90 per share associated with the warrant to purchase upto 47,821 shares of common stock issued in this offering, or a total of approximately $1.5 million, was recorded as an offset to additional paid-in capital, andwas estimated using a Black-Scholes valuation model with the following assumptions: Stock price$41.70 Exercise price$45.00 Expected dividend yield 0.00%Discount rate-bond equivalent yield 1.81%Expected life (in years) 5.00 Expected volatility 100.0%As of the closing of the Company’s December 8, 2017 offering, the estimated grant date fair value of $15.60 per share associated with the warrant to purchaseup to 8,208 shares of common stock issued to the placement agent in this offering, or99a total of approximately $0.1 million, was recorded as an offset to additional paid-in capital, and was estimated using a Black-Scholes valuation model withthe following assumptions: Stock price$22.20 Exercise price$25.50 Expected dividend yield 0.00%Discount rate-bond equivalent yield 2.09%Expected life (in years) 4.50 Expected volatility 100.0%As of the closing of the Company’s January 30, 2018 offering, the grant date fair value of the warrants issued to purchase up to 1,095,153 shares of commonstock were estimated to be approximately $8.82 per share, or a total of approximately $9.7 million. The warrants sold in this offering have an exercise price of$3.16 per share, which is subject to down round adjustment, and expire five years from the date of issuance. The fair value of the warrants was at issuanceestimated using a Monte Carlo simulation valuation model using Geometric Brownian Motion, incorporating anticipated future financing events, with thefollowing assumptions: Beginning stock price$10.17 Exercise price$15.00 Expected dividend yield 0.00%Discount rate-bond equivalent yield 2.48%Expected life (in years) 5.00 Expected volatility 99.00%As of the closing of the Company’s August 13, 2018 rights offering, the grant date fair value of the warrants issued to purchase up to 2,549,140 shares ofcommon stock were estimated to be approximately $3.30 per share, or a total of approximately $8.4 million. The warrants sold in this offering have anexercise price of $4.53 per share and expire five years from the date of issuance. The fair value of the warrants was estimated using a Black-Scholes model,incorporating the following assumptions: Beginning stock price$3.89 Exercise price$4.53 Expected dividend yield 0.00%Discount rate-bond equivalent yield 2.75%Expected life (in years) 5.00 Expected volatility 128.69%As of the closing of the Company’s September 20, 2018 offering, the grant date fair value of the warrants issued to purchase up to 762,438 shares of commonstock were estimated to be approximately $2.57 per share, or a total of approximately $2.0 million. The warrants sold in this offering have an exercise price of$3.16 per share, and expire five years from the initial exercise date, which is the six-month anniversary of the date of issuance. The fair value of the warrantswas estimated using a Black-Scholes model, incorporating the following assumptions: Beginning stock price$2.92 Exercise price$3.16 Expected dividend yield 0.00%Discount rate-bond equivalent yield 2.77%Expected life (in years) 5.50 Expected volatility 130.7%Also, included in the September 20, 2018 offering the Company issued 120,000 pre-funded warrants. The pre-funded warrants had an intrinsic value of$350,000. On November 28, 2018, the pre-funded warrants were exercised for total proceeds of approximately $1,200.100 6. Balance Sheet DetailsThe following provides certain balance sheet details: December 31, December 31, 2017 2018 Fixed Assets Machinery and equipment $2,841,388 $2,818,583 Furniture and office equipment 147,976 157,391 Computer equipment and software 1,637,034 1,437,408 Leasehold improvements 553,529 570,173 Financed equipment 2,294,762 2,573,955 Construction in process 2,975 116,640 7,477,664 7,674,150 Less accumulated depreciation and amortization (4,354,097) (4,934,728)Total fixed assets, net $3,123,567 $2,739,422 Accrued Liabilities Accrued interest $326,602 $- Accrued payroll 224,813 255,426 Accrued vacation 474,953 535,682 Accrued bonuses 375,000 712,574 Accrued sales commissions 104,509 62,767 Current portion of deferred rent 116,681 158,342 Accrued other 129,805 203,602 Total accrued liabilities $1,752,363 $1,928,393 7. April 2014 Credit FacilityOn April 30, 2014, the Company received net cash proceeds of approximately $4,898,000 pursuant to the execution of the April 2014 Credit Facility. Uponthe entry into the April 2014 Credit Facility, the Company was required to pay the lender a facility fee of $50,000 in conjunction with the funding of the termloan. The April 2014 Credit Facility was secured by substantially all of the Company’s personal property other than its intellectual property. The term loanunder the April 2014 Credit Facility bore interest at an annual rate of 7.95%. The Company was required to make interest-only payments on the term loanthrough August 1, 2015. The outstanding term loan under the April 2014 Credit Facility began amortizing at the end of the applicable interest-only period,with monthly payments of principal and interest being made by the Company to the lender in consecutive monthly installments following such interest-onlyperiod. The term loan under the April 2014 Credit Facility matured on July 1, 2018. Under the original terms of the underlying agreement, the Company wasalso required to make a final payment to the lender equal to 5.5% of the original principal amount of the term loan funded. A warrant to purchase up to 588 shares of the Company’s common stock at an exercise price of $424.80 per share with a term of 10 years was issued to OxfordFinance LLC on April 30, 2014. Issuance costs of approximately $102,000 associated with the term loan under the April 2014 Credit Facility were recordedas a discount to outstanding debt as of the closing date, resulting in net proceeds of approximately $4,898,000. The estimated fair value of the warrant issuedof approximately $233,000 was also recorded as a discount to outstanding debt as of the closing date. The discounts and other issuance costs are amortized tointerest expense utilizing the effective interest method over the underlying term of the loan, with total unamortized discounts of approximately $33,000 atDecember 31, 2017. The effective annual interest rate associated with the April 2014 Credit Facility was 13.87% at December 31, 2017. As of December 31,2017, total remaining principal payments of approximately $1,201,000 were due and such principal balance was paid during the year ended December 31,2018 with no outstanding principal balance remaining at December 31, 2018. 1018. Equipment FinancingsThe Company leases certain laboratory equipment under arrangements accounted for as capital leases and classified as equipment financings. The financedequipment is depreciated on a straight-line basis over periods ranging from 5 to 7 years. The total gross value of fixed assets capitalized under such financingarrangements was approximately $2,295,000 and $2,574,000 at December 31, 2017 and 2018, respectively. Total accumulated depreciation related tofinanced equipment was approximately $759,000 and $1,135,000 at December 31, 2017 and 2018, respectively, and total depreciation expense wasapproximately $234,000 and $376,000, at December 31, 2017 and 2018, respectively. Fixed asset purchases totaling approximately $719,000 and $279,000during the years ended December 31, 2017 and 2018, respectively, were recorded as equipment financings. On September 15, 2017, and as amended on October 17, 2017, the Company executed an equipment financing commitment with a third-party lender for totalproceeds to the Company of approximately $151,000, which was funded by the lender on November 2, 2017. Under the terms of the amended equipmentfinancing agreement, which was accounted for as a sale-leaseback transaction, fixed assets previously purchased by the Company with aggregate gross andnet book values of approximately $167,000 and $162,000, respectively, were granted as a security interest to the third-party lender, with the principalbalance plus interest to be repaid in 36 monthly installments of $4,884 totaling approximately $176,000 through October 2020.During the year ended December 31, 2017, certain machinery and equipment with aggregate gross, accumulated depreciation, and net book values ofapproximately $189,000, $155,000 and $34,000, respectively, were exchanged with a lender as partial payment on an outstanding equipment financingobligation balance.The following schedule sets forth the remaining future minimum lease payments outstanding under financed equipment arrangements, as well ascorresponding remaining sales tax and maintenance obligation payments that are expensed and accrued as incurred and due within each respective yearending December 31, as well as the present value of the total amount of the remaining minimum lease payments as of December 31, 2018: Maintenance Minimum and Sales Tax Lease Obligation Payments Payments 2019$670,896 $91,285 2020 551,610 72,635 2021 305,006 51,473 2022 264,600 60,832 Thereafter 310,932 45,710 Total payments 2,103,044 321,935 Less amount representing interest 476,493 - Present value of payments$1,626,551 $321,935The aggregate weighted average effective annual interest rate related to the equipment financings was 13.51% and 12.53% at December 31, 2017 and 2018,respectively, and the maturity dates on such outstanding arrangements range from June 2018 to September 2024. During the years ended December 31, 2017and 2018, total interest expense related to equipment financings of $171,000 and $237,000, respectively, was recorded to the Company’s statement ofoperations and comprehensive loss. At December 31, 2018, the present value of minimum lease payments due within one year was approximately $642,000.On January 26, 2018, the Company executed a lease agreement with a third-party lender to finance approximately $250,000 of planned fixed asset purchases.Under the terms of the lease agreement, the lease commencement and repayment occurs once the Company has financed equipment purchases for the fullamount available under the lease agreement. During the fourth quarter of 2018, the lease agreement was amended to increase the amount available under thelease to a total available cost of $332,000. During 2018, equipment with a total cost of $332,000 was purchased under the lease and the lease termcommenced on December 1, 2018. Under the term of the lease, the Company is required to make 22 payments of $15,274102per month during the term of the agreement. Prior to lease commencement in December 2018, the Company paid pro-rated equipment rental charges forequipment financed under this lease totaling approximately $124,000. 9. Supplier FinancingsIn 2017 and 2018, the Company obtained third-party financing for certain business insurance premiums. The 2017 and 2018 financings bore interest at ratesranging from 4.40% to 6.20% per annum, and all financings were due within one year. The balances due under these annual financing arrangements wereapproximately $61,000 as of December 31, 2017, and there were no balances outstanding as of December 31, 2018 under this arrangement. 10. Stock-Based CompensationEquity Incentive PlansThe Company maintains two equity incentive plans: The Amended and Restated 2013 Equity Incentive Plan, or the 2013 Plan, and the 2007 EquityIncentive Plan, or the 2007 Plan. The 2013 Plan includes a provision that shares available for grant under the Company’s 2007 Plan become available forissuance under the 2013 Plan and are no longer available for issuance under the 2007 Plan. At the Company’s annual meeting of stockholders held on June 28, 2018, the Company’s stockholders approved amendments to the 2013 Plan, whichincluded an increase in the number of non-inducement shares of common stock authorized for issuance under the 2013 Plan by 146,666 shares. As ofDecember 31, 2018, 124,211 shares of the Company’s common stock were authorized exclusively for the issuance of stock awards to employees who havenot previously been an employee or director of the Company, except following a bona fide period of non-employment, as an inducement material to theindividual’s entering into employment with the Company, as defined under applicable Nasdaq Listing Rules.As of December 31, 2018, under all plans, a total of 264,098 non-inducement shares were authorized for issuance, 95,258 shares had been issued with 79,300non-inducement stock options and restricted stock units, or RSUs, underlying outstanding awards, and 168,840 non-inducement shares were available forgrant. As of December 31, 2018, 118,368 inducement shares had been issued under the 2013 Plan, with 117,534 inducement stock options and RSUsunderlying outstanding awards and 0 inducement shares available for grant.Stock OptionsNon-performance options granted under either plan vest over a maximum period of four years and expire ten years from the date of grant. Non-performanceoptions generally vest either (i) over four years, 25% on the one-year anniversary of the date of grant and monthly thereafter for the remaining three years; or(ii) over four years, monthly vesting beginning month-one after the grant and monthly thereafter.The fair value of stock options is determined on the date of grant using the Black-Scholes valuation model. For non-performance awards, such value isrecognized as expense over the requisite service period, net of estimated forfeitures, using the straight-line method. The amount and timing of compensationexpense recognized for performance awards is based on management’s estimate of the most likely outcome and when the achievement of the performanceobjectives is probable. The determination of the fair value of stock options is affected by the Company’s stock price, as well as assumptions regarding anumber of complex and subjective variables. The volatility assumption is based on a combination of the historical volatility of the Company’s commonstock and the volatilities of similar companies over a period of time equal to the expected term of the stock options. The volatilities of similar companies areused in conjunction with the Company’s historical volatility because of the lack of sufficient relevant history for the Company’s common stock equal to theexpected term. The expected term of employee stock options represents the weighted-average period the stock options are expected to remain outstanding.The expected term assumption is estimated based primarily on the options’ vesting terms and remaining contractual life and employees’ expected exerciseand post-vesting employment termination behavior. The risk-free interest rate assumption is based upon observed interest rates on the grant date appropriatefor the term of the employee stock options. The dividend yield assumption is based on the expectation of no future dividend payouts by the Company.103The assumptions used in the Black-Scholes pricing model for options granted during the years ended December 31, 2017 and 2018 are as follows: 2017 2018 Stock and exercise prices $20.82 - $63.90 $0.86 - $6.00 Expected dividend yield 0.00% 0.00% Discount rate-bond equivalent yield 1.79% – 2.27% 2.50% - 3.02% Expected life (in years) 5.12 – 6.09 4.00 - 5.96 Expected volatility 70.0% – 90.0% 100% - 120%Using the assumptions described above, with stock and exercise prices being equal on date of grant, the weighted-average estimated fair value of optionsgranted in 2017 and 2018 were approximately $1.02 and $1.75 per share, respectively.A summary of stock option activity for the years ended December 31, 2017 and 2018 is as follows: Number ofShares WeightedAverage ExercisePrice Per Share WeightedAverageRemainingContractualTerm in Years Outstanding at December 31, 2016 29,888 $264.00 8.5 Granted 58,501 $44.70 Exercised — — Cancelled/forfeited/expired (6,746) $143.10 Outstanding at December 31, 2017 81,643 $113.68 8.8 Granted 142,587 $2.20 Exercised — — Cancelled/forfeited/expired (28,410) $57.96 Outstanding at December 31, 2018 195,820 $41.41 9.2 Vested and unvested expected to vest, December 31, 2018 183,136 $44.02 9.1 The intrinsic values of options outstanding, options exercisable, and options vested and unvested expected to vest at December 31, 2017 and 2018 were eachzero. On July 25, 2016, the Company entered into an employment agreement with its new Chief Financial Officer, Senior Vice President of Operations andSecretary, or CFO. Pursuant to the terms of this employment agreement, on July 29, 2016 the CFO was granted inducement stock option awards with anexercise price of $58.50 per share to purchase up to (i) 2,222 shares of the Company’s common stock with an estimated grant date fair value of $43.50 pershare, 25% of which vested on the one-year anniversary of the commencement of the CFO’s employment with the Company, and remainder of which will vestin equal monthly installments over the following three years, and (ii) 1,111 shares of the Company’s common stock with an estimated grant date fair value of$37.80 per share, which vested upon the Company’s achievement of specified corporate goals for 2016 and the consummation of a specified financingtransaction. During the year ended December 31, 2017, 546 shares of the performance option award granted on July 29, 2016 were declared vested by theCompany’s Board of Directors, and the remaining 565 shares underlying this award were forfeited.On May 2, 2017, the Company’s Board of Directors approved the issuance of an aggregate of 18,333 performance stock options to be granted on May 31,2017 to certain of the Company’s employees and all of its executive officers pursuant to the 2013 Plan, of which 6,666 performance stock options weregranted to the Company’s CEO, 3,333 performance stock options were granted to its CFO, and 2,500 performance stock options were granted to each of itsChief Scientific Officer and Senior Medical Director. Each performance stock option granted on May 31, 2017 has an exercise price of $45.00 per share andan estimated grant date fair value of $29.70 per share. On July 6, 2017, the Company’s Compensation Committee of the Board of Directors approved theissuance of an aggregate of 2,500 performance stock options to be granted on July 31, 2017 to certain of the Company’s employees pursuant to the 2013Plan, of which 2,500 performance stock options were forfeited by December 31, 2017. Each performance stock option granted on July 31, 2017 has anexercise price of $41.70 per share and an104estimated grant date fair value of $24.90 per share. Each of the performance stock options granted during the year ended December 31, 2017 were subject tocontinuing service with vesting as determined by the Company’s Board of Directors or Compensation Committee of the Board of Directors upon theCompany’s achievement of specified corporate goals for 2017. Subsequent to the year ended December 31, 2017, none of the performance option awardsgranted during the year ended December 31, 2017 were declared vested by the Company’s Compensation Committee of the Board of Directors, and the20,750 shares underlying the remaining outstanding performance stock option awards at December 31, 2017 were forfeited.Restricted StockThe fair value of RSUs awarded under either plan is determined by the closing price of the Company’s common stock on the date of grant. For non-performance RSUs, such value is recognized as expense over the requisite service period, net of estimated forfeitures, using the straight-line method. Theamount and timing of compensation expense recognized for RSUs is based on management’s estimate of the most likely outcome and when the achievementof the performance objectives is probable.A summary of RSU activity during 2017 and 2018 is as follows: Number ofShares WeightedAverage GrantDate Fair Value Outstanding at December 31, 2016 5,808 $80.40 Granted 11,666 $45.00 Vested and issued (5,194) $58.80 Forfeited (250) $63.60 Outstanding at December 31, 2017 12,030 $56.10 Granted — $— Vested and issued (5,835) $45.00 Forfeited (5,835) $45.00 Outstanding at December 31, 2018 360 $415.80 Vested and unvested expected to vest, December31, 2018 360 $415.80 At December 31, 2018, the intrinsic value of RSUs outstanding and RSUs unvested and expected to vest were approximately $300. Of the 360 RSUsoutstanding at December 31, 2018, all were fully vested.The RSUs granted during the year ended December 31, 2016 vested fully on the one year anniversary of the date of grant and were subject to continuingservice by the holders of such RSUs. At December 31, 2017, the intrinsic values of RSUs outstanding and RSUs unvested and expected to vest wereapproximately $250,000 and $129,000, respectively. On May 2, 2017, the Company’s Board of Directors approved the issuance of an aggregate of 5,833 time-based RSUs and 5,833 performance RSUs to begranted on May 31, 2017 to certain of the Company’s employees and all of its executive officers pursuant to the 2013 Plan, of which 1,666 time-based RSUsand 833 performance RSUs were granted to its CEO, and 833 time-based RSUs and 833 performance RSUs were granted to certain other executive officers.Each RSU granted on May 31, 2017 has a grant date fair value of $45.00 per share. Vesting of the time-based RSUs granted on May 31, 2017 is subject tocontinuing service and occurred on the one year anniversary of the vesting commencement date, or May 2, 2018, while the performance RSUs were subject tocontinuous service and vesting was as determined by the Company’s Board of Directors or its Compensation Committee of the Board of Directors upon theachievement of specified corporate goals for 2017. Subsequent to the year ended December 31, 2017, none of the performance RSUs granted on May 31,2017 were declared vested by the Company’s Compensation Committee of the Board of Directors, and the 5,833 shares underlying these awards wereforfeited.105Stock-based Compensation ExpenseThe following table presents the effects of stock-based compensation related to equity awards to employees and nonemployees on the statement of operationsduring the periods presented: Years Ended December 31, 2017 2018 Stock Options Cost of revenues $142,400 $46,708 Research and development expenses 143,300 133,525 General and administrative expenses 575,741 300,433 Sales and marketing expenses 68,381 78,321 Total expenses related to stock options 929,822 558,987 RSUs Cost of revenues 48,745 (18,802)Research and development expenses 55,941 13,576 General and administrative expenses 160,937 54,302 Sales and marketing expenses 52,036 15,349 Total stock-based compensation $1,247,481 $623,412 Stock-based compensation expense was recorded net of estimated forfeitures of 0% - 8% per annum during the years ended December 31, 2017 and 2018. Asof December 31, 2018, total unrecognized share-based compensation expense related to unvested stock options and RSUs, adjusted for estimated forfeitures,was approximately $667,000, and such amount expected to be recognized over a weighted-average period of approximately 2.13 years. 11. Common Stock Warrants OutstandingA summary of equity-classified common stock warrant activity, for warrants other than those underlying unexercised overallotment option warrants, during2017 and 2018 is as follows: Average Weighted Remaining Number of Average Exercise Contractual Shares Price Per Share Term in Years Outstanding at December 31, 2016 387,395 $ 57.90 4.6 Issued 128,029 $ 60.62 Exercised (227,228) $ 33.00 Expired — $ — Outstanding at December 31, 2017 288,196 $ 78.86 4.0 Issued 4,526,661 $ 3.85 Exercised (120,000) $ 0.01 Expired — $ — Outstanding at December 31, 2018 4,694,927 $ 8.55 4.4 All warrants outstanding at December 31, 2018 are exercisable, except for the 762,438 warrants issued on September 24, 2018, which were first exercisable onMarch 24, 2019 and expire on March 24, 2024.The intrinsic value of equity-classified common stock warrants outstanding at December 31, 2018 was zero.106On January 30, 2018, the Company issued warrants to purchase up to an aggregate of 1,095,153 shares of its common stock, which had an exercise price of$15.00 per share, subject to down round adjustment, are exercisable immediately and expire five years from the date of issuance. As a result of the downround adjustment feature of these warrants, these warrants have a current exercise price of $3.16 per share as of December 31, 2018. 12. Net Loss per Common ShareBasic and diluted net loss per common share is determined by dividing net loss applicable to common shareholders by the weighted-average common sharesoutstanding during the period. Because there is a net loss attributable to common shareholders for the years ended December 31, 2017 and 2018, theoutstanding RSUs, warrants, and common stock options have been excluded from the calculation of diluted loss per common share because their effect wouldbe anti-dilutive. Therefore, the weighted-average shares used to calculate both basic and diluted loss per share are the same.The following potentially dilutive securities have been excluded from the computations of diluted weighted-average shares outstanding for the periodspresented, as they would be anti-dilutive: For the year ended December 31, 2017 2018 Preferred warrants outstanding (number of common stockequivalents) 17 17 Common warrants outstanding 288,196 4,694,927 RSUs outstanding 12,030 360 Convertible preferred stock outstanding (number ofcommon stock equivalents) — 976,157 Common options outstanding 81,643 195,820 Total anti-dilutive common share equivalents 381,886 5,867,281 13. 401(k) PlanThe Company sponsors a 401(k) savings plan for all eligible employees. The Company may make discretionary matching contributions to the plan to beallocated to employee accounts based upon employee deferrals and compensation. During the years ended December 31, 2017 and 2018, the Company made$90,000 and approximately $215,000, respectively, in matching contributions into the savings plan. 10714. Income TaxesOn December 22, 2017, the President of the United States signed into law new legislation, or the Act, that significantly revises the Internal Revenue Code of1986, as amended, or the Code. The Act amends the Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses. Forbusinesses, the Act reduces the corporate tax rate from a maximum of 35% to a flat 21% rate. The rate reduction was effective on January 1, 2018. As a resultof the rate reduction, the Company has reduced the deferred tax asset balance as of December 31, 2017 by approximately $2.6 million. Due to the Company'sfull valuation allowance position, the Company has also reduced the valuation allowance by the same amount. Due to uncertainties which currently exist inthe interpretation of the provisions of the Act regarding Code Section 162(m), the Company has not evaluated the potential impacts of Code Section 162(m)as amended by the Act on its financial statements.On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act which, among a broad range of tax reform measures,reduced the U.S. corporate tax rate from 35% to a flat 21% effective January 1, 2018. The reduction in the U.S. corporate tax rate required the Company toremeasure the federal portion of deferred tax assets and liabilities at December 31, 2017 to the enacted tax rate expected to apply when the temporarydifferences are to be realized. The Company provisionally recorded $2.6 million of expense related, offset by a full valuation allowance, for theremeasurement of its deferred tax assets and liabilities. As of December 31, 2018, the Company completed its accounting for the tax effects of the enactmentof the 2017 Act which resulted in immaterial adjustments to provisional estimates, offset by a full valuation allowance.For the years ended December 31, 2017 and 2018, the provision for income taxes was calculated as follows: For the year ended December 31, 2017 2018 Current: Federal $— $— State 7,624 1,886 Total 7,624 1,886 Deferred Federal — — State — — Total — — Provision for income tax $7,624 $1,886 The following table reconciles income taxes computed at the federal statutory rate and the Company’s provision for income taxes: For the year ended December 31, 2017 2018 Income tax at statutory rate $(7,346,079) $(5,159,881)Change in federal tax rate 2,621,803 — State liability (411,853) (670,015)Permanent items 214,313 118,959 Stock compensation 72,696 11,128 Nondeductible interest 15,568 — Expiration of net operating losses 922,307 — Research and development credit (200,379) (272,314)State rate change (18,026) (132,855)Estimated section 382 limitation 1,491,942 — Return to provision 365,263 8,386 Other 488,264 19,420 Valuation allowance 1,791,805 6,079,058 Provision for income tax $7,624 $1,886108Deferred income taxes are provided for temporary differences in recognizing certain income and expense items for financial and tax reporting purposes. Thedeferred tax assets consisted primarily of the income tax benefits from estimated net operating loss carryforwards, deferred rent, and estimated research anddevelopment credits. Valuation allowances have been recorded to fully offset deferred tax assets at December 31, 2017 and 2018, as it is more likely than notthat the assets will not be utilized.At December 31, 2018, the Company had estimated federal net operating loss carryforwards of approximately $13.6 million expiring beginning in 2035 andtotal estimated state net operating loss carryforwards of approximately $24.7 million expiring beginning in 2023. The Company has additional federal netoperating losses of $23.6 million generated after 2017, which carry over indefinitely and may generally be used to offset up to 80% of future taxableincome. Additionally, at December 31, 2018, the Company had estimated research and development credits of approximately $160,000 and $3,543,000 forfederal and California purposes, respectively. The estimated federal research and development tax credits will begin to expire in 2035. The Californiaresearch and development tax credits do not expire.For the years ended December 31, 2017 and 2018, the Company has evaluated the various tax positions reflected in its income tax returns for both federaland state jurisdictions, to determine if the Company has any uncertain tax positions on the historical tax returns. The Company recognizes the impact of anuncertain tax position on an income tax return at the largest amount that the relevant taxing authority is more-likely-than not to sustain upon audit. TheCompany does not recognize uncertain income tax positions if they have less than 50 percent likelihood of being sustained. Based on this assessment, theCompany believes there are no tax positions for which a liability for unrecognized tax benefits should be recorded as of December 31, 2017 or 2018. TheCompany is subject to U.S. federal income tax as well as income tax in multiple state jurisdictions. With few exceptions, the Company is no longer subject toU.S. federal income tax examinations for 2015 and before, state and local income tax examinations 2014 and before. However, to the extent allowed by law,the tax authorities may have the right to examine prior periods where net operating losses were generated and carried forward and make adjustments up to theamount of the net operating loss carry forward amount. The Company’s policy is to recognize interest and penalties related to income tax matters in incometax expense. Due to the existence of the valuation allowance, future changes in unrecognized tax benefits will not impact the Company’s effective tax rate.The Company is currently not under examination by any taxing authorities and does not believe its unrecognized tax benefits will significantly change inthe next twelve months.The tax effects of carryforwards and other temporary differences that give rise to deferred tax assets consist of the following: For the year ended December 31, 2017 2018 Estimated net operating loss carryforward $3,699,532 $9,229,174 Estimated research and development credits 2,686,665 2,958,710 Accruals and other 2,560,419 2,864,028 Deferred rent 90,866 64,628 9,037,482 15,116,540 Less valuation allowance (9,037,482) (15,116,540)Net deferred tax assets $— $—Utilization of the estimated domestic net operating loss and research and development credit carryforwards may be subject to a substantial annual limitationdue to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 and 383 of the Code, as well assimilar state provisions. These ownership changes may limit the amount of estimated net operating loss and research and development credit carryforwardsthat can be utilized annually to offset future taxable income and tax, respectively. In general, an “ownership change” as defined by Section 382 of the Coderesults from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of theoutstanding stock of a company by certain stockholders. Since the Company’s formation, the Company has raised capital through the issuance of capitalstock on several occasions which on its own or combined with the purchasing stockholders’ subsequent disposition of those shares, likely resulted in such anownership change, or could result in an ownership change in the future.Upon the occurrence of an ownership change under Section 382 of the Code as outlined above, utilization of the estimated net operating loss and researchand development credit carryforwards are subject to an annual limitation under Section 382,109which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term, tax-exempt rate,which could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the estimated net operating loss orresearch and development credit carryforwards before utilization. The Company has not yet completed an analysis to determine whether an ownership changehas occurred, however, the Company believes ownership changes likely occurred in each year from 2015 through 2018. As a result, the Company hasestimated that the use of its net operating loss is limited and has disclosed in the table above only the amounts it estimates could be used in the future, whichremain fully offset by a valuation allowance to reduce the net asset to zero. 15. Related Party TransactionsA member of the Company’s management is the controlling person of Aegea Biotechnologies, Inc., or Aegea. On September 2, 2012, the Company enteredinto an Assignment and Exclusive Cross-License Agreement, or the Cross-License Agreement, with Aegea. The Company received payments totalingapproximately $15,000 and $19,000 during the years ended December 31, 2017 and 2018, respectively, from Aegea as reimbursements for shared patentcosts under the Cross-License Agreement.Pursuant to a sublease agreement dated March 30, 2015, the Company subleased 9,849 square feet, plus free use of an additional area, of its San Diegofacility to an entity affiliated with the Company’s non-executive Chairman for $12,804 per month, with a refundable security deposit of $12,804 receivedfrom the subtenant. The initial term of the sublease expired on July 31, 2015 and was subject to renewal on a month-to-month basis thereafter. On February 1,2017, the Company received notice from the subtenant terminating the sublease effective March 31, 2017. During the year ended December 31, 2017, thetotal amount of the $12,804 security deposit previously received from the subtenant was applied against approximately $16,000 in additional rents owed as aresult of the subtenant continuing to occupy the subleased areas beyond March 31, 2017, and the balance of approximately $3,200 due to the Company waswaived. A total of approximately $51,000 in rental income was recorded to other income/(expense) in the Company’s statement of operations andcomprehensive loss during the year ended December 31, 2017. There was no income associated with this arrangement in 2018. 16. Commitments and ContingenciesOperating LeasesThe Company leases office, laboratory, and warehouse space at its San Diego, California facility under a non-cancelable operating lease. The initial lease wasfor an eight-year term expiring in 2012. In November 2011, the Company extended the lease term through October 31, 2018 and expanded the originalpremises by 9,849 square feet. Under the amended lease, the landlord delivered the expanded premises in May 2013. In September 2013, the Companyextended the lease term through July 31, 2020. The Company records rent expense on a straight-line basis over the life of the lease and records the excess ofexpense over the amounts paid as deferred rent. During each of the years ended December 31, 2017 and 2018, total rent expense recorded in the Company’sstatements of operations and comprehensive loss was approximately $1,272,000.The future minimum lease payments under the amended lease agreement as December 31, 2018 are as follows: 2019 $1,430,366 2020 855,136 Thereafter — Total $2,285,502 Purchase CommitmentIn February 2016, the Company signed a firm, non-cancelable, and unconditional commitment in an aggregate amount of $1,062,500 with a vendor topurchase certain inventory items, payable in minimum quarterly amounts of $62,500 through May 2020. At December 31, 2018, approximately $341,000remained outstanding under this purchase commitment.110Financed Equipment Maintenance and Sales Tax ObligationsDuring the years ended December 31, 2017 and 2018, total expense recorded in the Company’s statement of operations and comprehensive loss for sales taxand maintenance obligations associated with equipment financing arrangements was approximately $79,000 and $101,000, respectively. At December 31,2018, approximately $69,000 of such sales tax and maintenance obligations incurred but not paid were recorded in accrued other liabilities in theCompany’s balance sheet (see Note 6). Future payments totaling approximately $322,000 for sales tax and maintenance obligations associated with financedequipment were due under equipment financing arrangements at December 31, 2018, which will be expensed as incurred (see Note 8).Legal ProceedingsIn the normal course of business, the Company may be involved in legal proceedings or threatened legal proceedings. The Company is not party to any legalproceedings or aware of any threatened legal proceedings which are expected to have a material adverse effect on its financial condition, results of operationsor liquidity. 17. Selected Quarterly Financial Data (Unaudited)The following is selected quarterly financial data as of and for the periods ending: First Quarter Second Quarter Third Quarter Fourth Quarter December 31, 2017 Balance sheet data: Cash $14,042,388 $10,000,155 $5,879,025 $2,146,611 Total assets 17,933,413 14,653,193 11,120,215 7,378,906 Total non-current liabilities 2,062,544 1,561,520 1,255,939 1,421,527 Total shareholders’ equity 10,418,069 7,342,257 4,026,079 1,296,034 Statement of operations and comprehensive loss data: Net revenues $1,683,065 $1,278,961 $1,111,411 $995,226 Cost of revenues 2,129,454 2,368,705 2,487,054 2,359,909 Research and development expenses 757,258 841,991 856,698 908,800 General and administrative expenses 1,906,635 1,798,026 1,834,771 1,650,097 Sales and marketing expenses 1,278,311 1,746,867 1,675,852 1,642,941 Loss from operations (4,388,593) (5,476,628) (5,742,964) (5,566,521)Net loss $(4,432,707) $(5,693,151) $(5,821,306) $(5,666,573)Net loss per common share:1 Basic $(6.27) $(6.32) $(5.85) $(5.36) Diluted $(6.27) $(6.32) $(5.85) $(5.36) Weighted-average shares outstanding used in computing net lossper share attributable to common shareholders: Basic 707,389 901,007 995,254 1,058,055 Diluted 707,389 901,007 995,254 1,058,055 1Basic and diluted net loss per common share are computed independently for each of the components and quarters presented. Therefore, the sum ofquarterly basic and diluted per share information may not equal annual basic and diluted net loss per common share.111 First Quarter Second Quarter Third Quarter Fourth Quarter December 31, 2018 Balance sheet data: Cash $9,272,420 $2,569,111 $8,956,200 $3,423,373 Total assets 14,747,827 8,291,310 14,551,892 8,750,303 Total non-current liabilities 1,357,193 1,258,261 1,174,397 1,098,137 Total shareholders’ equity 8,507,714 2,527,568 8,938,408 3,042,519 Statement of operations and comprehensive loss data: Net revenues $806,943 $822,238 $761,591 $859,526 Cost of revenues 2,434,886 2,699,671 2,481,916 2,435,262 Research and development expenses 1,070,584 1,019,285 1,089,746 1,288,957 General and administrative expenses 1,938,664 1,708,970 1,793,720 1,632,670 Sales and marketing expenses 1,636,542 1,433,174 1,404,192 1,440,798 Loss from operations (6,273,733) (6,038,862) (6,007,983) (5,938,161)Net loss $(6,356,404) $(6,153,101) $(6,047,784) $(6,014,312)Deemed dividend related to warrants down round provision — — (636,370) — Net loss attributable to common shareholders $(6,356,404) $(6,153,101) $(6,684,154) $(6,014,312)Net loss per common share:1 Basic $(3.33) $(2.70) $(2.42) $(1.43) Diluted $(3.33) $(2.70) $(2.42) $(1.43) Weighted-average shares outstanding used in computing net lossper share attributable to common shareholders: Basic 1,911,282 2,280,115 2,767,440 4,209,221 Diluted 1,911,282 2,280,115 2,759,614 4,209,221 1Basic and diluted net loss per common share are computed independently for each of the components and quarters presented. Therefore, the sum ofquarterly basic and diluted per share information may not equal annual basic and diluted net loss per common share. 18. Subsequent Events On January 18, 2019, the Company completed an offering of 990,000 shares of the Company’s common stock. The shares were sold at a purchase price of$2.25 per share and the net proceeds to the Company from this offering were approximately $2.0 million, after deducting expenses related to the offeringincluding dealer-manager fees and expenses.On February 12, 2019, the Company received net cash proceeds of approximately $6.8 million as a result of the closing of a follow-on public offering of6,250,000 shares of its common stock and warrants to purchase up to an aggregate of 6,250,000 shares of its common stock at a combined offering price of$1.20 per unit. All warrants sold in this offering have an exercise price of $1.20 per share, are exercisable immediately and expire five years from the date ofissuance. In addition, the Company sold warrants to purchase up to an aggregate of 937,500 shares of the Company’s common stock in connection with thepartial exercise of the over-allotment option granted to the underwriters. Subsequent to the closing of this offering, no additional cash proceeds have beenreceived from the exercise of warrants sold in this offering. On March 11, 2019, the underwriters exercised their overallotment option for 538,867 shares ofthe Company’s common stock related to the February 12, 2019 follow-on offering, purchasing shares at $1.20 for net cash proceeds of approximately$601,000.112Pursuant to the down round adjustment feature of the January 2018 warrants, the exercise price of these warrants was adjusted to the $1.20 price per shareoffering price in the February 2019 financing transaction.On March 19, 2019, the Company received net cash proceeds of approximately $7.5 million as a result of completing a registered direct offering of 5,950,000shares at a negotiated purchase price of $1.37 per share. In addition, in a concurrent private placement, the Company issued to purchasers a warrant topurchase one share of the Company’s common stock for each share purchased for cash in the offering. All warrants issued in this offering have an exerciseprice of $1.25 per share, are exercisable immediately upon issuance and expire 5.5 years following the date of issuance. 113Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.Not applicable.Item 9A. Controls and Procedures.Disclosure Controls and ProceduresOur management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosurecontrols and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the ExchangeAct) as of December 31, 2018, the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief FinancialOfficer have concluded that our disclosure controls and procedures were effective as of the end of such period.Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our management’s annual report on internal control over financial reporting is set forth below.Management’s Report on Internal Control over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRules 13a-15(f) and 15d-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements.Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation andpresentation.We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—IntegratedFramework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under theframework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as ofDecember 31, 2018.This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financialreporting. Our report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the Securities and ExchangeCommission that permit us to provide only management’s report in this report.Changes in Internal Control over Financial ReportingThere has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonablylikely to materially affect, our internal controls over financial reporting.Item 9B. Other Information.Not applicable.114PART IIIItem 10. Directors, Executive Officers and Corporate Governance.The information required by this item and not set forth below will be set forth in the sections entitled “Election of Directors” and “Executive Officers” in ourProxy Statement for our 2019 Annual Meeting of Stockholders, or Proxy Statement, to be filed with the SEC within 120 days after the end of the fiscal yearended December 31, 2018, and is incorporated herein by reference.We have adopted a code of ethics that applies to our Chief Executive Officer and other senior financial officers (our Chief Financial Officer, Controller andother senior financial officers performing similar functions), which we refer to as the Code of Business Conduct and Ethics. The Code of Business Conductand Ethics is available on our website at www.biocept.com under the Corporate Governance section of the Investor Relations portion of the website. OurCode of Business Conduct and Ethics is designed to meet the requirements of Section 406 of Regulation S-K and the rules promulgated thereunder. We willpromptly disclose on our website (i) the nature of any amendment to the Code of Business Conduct and Ethics that applies to any covered person, and (ii) thenature of any waiver, including an implicit waiver, from a provision of the Code of Business Conduct and Ethics that is granted to one of the covered persons.Item 11. Executive Compensation.The information required by this item will be set forth in the section entitled “Executive Compensation” in our Proxy Statement and is incorporated hereinby reference.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.The information required by this item will be set forth in the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and“Executive Compensation” in our Proxy Statement and is incorporated herein by reference.Item 13. Certain Relationships and Related Transactions, and Director Independence.The information required by this item will be set forth in the section entitled “Transactions with Related Persons” in our Proxy Statement and is incorporatedherein by reference.Item 14. Principal Accounting Fees and Services.The information required by this item will be set forth in the section entitled “Ratification of Selection of Independent Registered Public Accounting Firm”in our Proxy Statement and is incorporated herein by reference. 115PART IV Item 15. Exhibits, Financial Statement Schedules.(a) The following documents are filed as part of this Report:1. Financial Statements. The following documents are included in Part II, Item 8 of this Report and are incorporated by reference herein: PageNo. Report of Independent Registered Public Accounting Firm 80Balance Sheets at December 31, 2018 and 2018 81Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2018 and 2017 82Statements of Shareholders’ Equity for the Years Ended December 31, 2018 and 2017 83Statements of Cash Flows for the Years Ended December 31, 2018 and 2017 84Notes to Financial Statements 872. Financial Statement Schedules.3. Exhibits.Item 16. Form 10-K Summary.None.116EXHIBITSExhibit No. Description of Exhibit3.1 Certificate of Amendment of Certificate of Incorporation (incorporated by reference to Exhibit 3.1.4 of the Registrant’s Current Report on Form8-K, filed with the SEC on February 14, 2014).3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2.1 of the Registrant’s Registration Statement on Form S-1 (File No.333-191323), filed with the SEC on September 23, 2013).3.3 Certificate of Amendment of Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form8-K, filed with the SEC on September 29, 2016).3.4 Amendment to Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K, filedwith the SEC on September 29, 2017).3.5 Certificate of Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form8-K, filed with the SEC on July 6, 2018).3.6 Certificate of Designation of Preference, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to Exhibit3.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on August 13, 2018).4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6.4.2 Specimen Common Stock certificate of Biocept, Inc. (incorporated by reference to Exhibit 4.3 of the Registrant’s Annual Report on Form 10-K,filed with the SEC on March 28, 2017).4.3 Form of Representative’s Warrant, dated February 10, 2014 (incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statementon Form S-1 (File No. 333-191323), as amended, filed with the SEC on November 20, 2013).4.4 Form of Warrant issued to the lenders under the Loan and Security Agreement, dated as of April 30, 2014, by and among Biocept, Inc., OxfordFinance LLC, as collateral agent, and the lenders party thereto from time to time, including Oxford Finance LLC (incorporated by reference toExhibit 4.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on May 6, 2014).4.5 Form of Warrant to Purchase Common Stock (incorporated by reference to Exhibit 4.5 of the Registrant’s Registration Statement on Form S-1(File No. 333-201437), as amended, filed with the SEC on February 6, 2015).4.6 Warrant to Purchase Preferred Stock, dated September 10, 2012, issued by the Registrant in favor of ARE-SD Region No. 18, LLC (incorporatedby reference to Exhibit 10.11.3 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC onSeptember 23, 2013).4.7 Warrant to Purchase Common Stock, dated September 10, 2013, issued by the Registrant in favor of ARE-SD Region No. 18, LLC(incorporated by reference to Exhibit 10.11.6 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SECon September 23, 2013).4.8 Warrant to Purchase Preferred Stock dated as of January 21, 2009, issued by the Registrant in favor of Goodman Co. Ltd. (incorporated byreference to Exhibit 10.17.1 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC onSeptember 23, 2013).4.9 Warrant to Purchase Common Stock dated as of July 31, 2013, issued by the Registrant in favor of Goodman Co. Ltd. (incorporated byreference to Exhibit 10.17.3 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC onSeptember 23, 2013).4.10 Form of Warrant to Purchase Preferred Stock, issued by the Registrant in favor of various investors under the Note and Warrant PurchaseAgreement dated as of January 13, 2012 (incorporated by reference to Exhibit 10.19.3 of the Registrant’s Registration Statement on Form S-1(File No. 333-191323), filed with the SEC on September 23, 2013).4.11 Form of Amendment of Warrant to Purchase Preferred Stock, dated as of September 13, 2013 (incorporated by reference to Exhibit 10.19.4 ofthe Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC on September 23, 2013).117Exhibit No. Description of Exhibit4.12 Form of Warrant to Purchase Common Stock, issued by the Registrant in favor of various investors under the Note and Warrant PurchaseAgreement dated as of June 28, 2013 (incorporated by reference to Exhibit 10.20.2 of the Registrant’s Registration Statement on Form S-1 (FileNo. 333-191323), filed with the SEC on September 23, 2013).4.13 Form of Warrant to Purchase Common Stock, issued by the Registrant in favor of various guarantors under the Reimbursement Agreementdated as of July 11, 2013 (incorporated by reference to Exhibit 10.21.1 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC on September 23, 2013).4.14 Form of Common Stock Purchase Warrant issued to the investors under the Securities Purchase Agreement, dated April 29, 2016, by and amongBiocept, Inc. and the purchasers signatory thereto (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K,filed with the SEC on April 29, 2016).4.15 Form of Warrant to Purchase Common Stock (incorporated by reference to Exhibit 4.16 of the Registrant’s Post-Effective Amendment toRegistration Statement on Form S-1 (File No. 333-213111), as amended, filed with the SEC on October 14, 2016).4.16 Form of Common Stock Purchase Warrant issued to the investors under the Securities Purchase Agreement, dated March 28, 2017, by andamong Biocept, Inc. and the purchasers signatory thereto (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form8-K, filed with the SEC on March 30, 2017).4.17 Common Stock Purchase Warrant issued by the Registrant in favor of Ally Bridge LB Healthcare Master Fund Limited under the CommonStock and Warrant Purchase Agreement dated August 9, 2017 (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report onForm 8-K, filed with the SEC on August 10, 2017).4.18 Common Stock Purchase Warrant issued in favor of Dawson James Securities, Inc. under the Securities Purchase Agreement dated December 5,2017 (incorporated by reference to Exhibit 4.18 of the Registrant’s Registration Statement on Form S-1 (File No. 333-221648), as amended,filed with the SEC on January 22, 2018).4.19 Form of Warrant to Purchase Common Stock issued to the investors under the Securities Purchase Agreement, dated January 26, 2018(incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on January 30, 2018).4.20 Warrant Agency Agreement dated August 13, 2018 by and between the Registrant and Continental Stock Transfer & Trust Company(incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on August 13, 2018).4.21 Form of Series 1 Common Stock Purchase Warrant (incorporated by reference to Exhibit 3.6 of the Registrant’s Registration Statement on FormS-1 (File No. 333-225147), as amended, filed with the SEC on July 11, 2018).4.22 Form of Pre-Funded Warrant (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC onSeptember 24, 2018).4.23 Form of Series A Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K,filed with the SEC on September 24, 2018).4.24 Form of Series B Common Stock Warrant (previously filed).4.25 Form of Pre-Funded Warrant (previously filed).4.26 Form of Series B Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K,filed with the SEC on March 18, 2019).10.1+ 2007 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC on September 23, 2013).10.2+ Form of Stock Option Grant Notice and Option Agreement under 2007 Equity Incentive Plan (incorporated by reference to Exhibit 10.1.1 ofthe Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC on September 23, 2013).10.3+ Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under 2007 Equity Incentive Plan (incorporated by referenceto Exhibit 10.1.2 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC on September 23, 2013).118Exhibit No. Description of Exhibit10.4+ Form of Indemnification Agreement between the Registrant and its officers and directors (incorporated by reference to Exhibit 10.3 of theRegistrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC on September 23, 2013).10.5+ Form of Indemnity Agreement between Biocept, Inc., a California corporation, and its officers and directors (incorporated by reference toExhibit 10.4 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC on September 23, 2013).10.6+ Employment Agreement, between the Registrant and Michael W. Nall, effective as of August 26, 2013 (incorporated by reference to Exhibit10.6 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC on September 23, 2013).10.7+ Employment Agreement, between the Registrant and Lyle J. Arnold, dated April 30, 2011 (incorporated by reference to Exhibit 10.7 of theRegistrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC on September 23, 2013).10.8 Lease, between the Registrant and Nexus Equity VIII LLC, dated March 31, 2004 (incorporated by reference to Exhibit 10.11 of theRegistrant’s Registration Statement on Form S-1 (File No. 333-191323), as amended, filed with the SEC on November 5, 2013).10.9 First Amendment to Lease, between the Registrant and ARE-SD Region No. 18, LLC, dated November 1, 2011(incorporated by reference toExhibit 10.11.1 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC on September 23, 2013).10.10 Second Amendment to Lease, between the Registrant and ARE-SD Region No. 18, LLC, dated September 10, 2012 (incorporated by referenceto Exhibit 10.11.2 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed with the SEC on September 23, 2013).10.11 Third Amendment to Lease, between the Registrant and ARE-SD Region No. 18, LLC, dated as of January 31, 2013, and effective as of January1, 2013 (incorporated by reference to Exhibit 10.11.4 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), filed withthe SEC on September 23, 2013).10.12 Fourth Amendment to Lease, between the Registrant and ARE-SD Region No. 18, LLC, dated as of September 10, 2013, and effective as ofAugust 1, 2013 (incorporated by reference to Exhibit 10.11.5 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323),filed with the SEC on September 23, 2013).10.13 Assignment and Exclusive Cross-License Agreement between the Registrant and Aegea Biotechnologies, Inc. dated June 2, 2012 (incorporatedby reference to Exhibit 10.22 of the Registrant’s Registration Statement on Form S-1 (File No. 333-191323), as amended, filed with the SEC onJanuary 30, 2014).10.14 Loan and Security Agreement by and among Biocept, Inc., Oxford Finance LLC, as collateral agent, and the lenders party thereto from time totime, including Oxford Finance LLC, dated as of April 30, 2014 (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Reporton Form 8-K, filed with the SEC on May 6, 2014).10.15+ 2014 Annual Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SECon August 8, 2014).10.16+ First Amendment to Employment Agreement by and between the Registrant and Michael W. Nall, dated November 6, 2015 (incorporated byreference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q, filed with the SEC on November 9, 2015).10.17+ Employment Agreement between the Registrant and Timothy Kennedy, dated July 25, 2016 (incorporated by reference to Exhibit 99.2 to theRegistrant’s Current Report on Form 8-K, filed with the SEC on July 27, 2016).10.18 Second Amendment to Loan and Security Agreement by and among Biocept, Inc., Oxford Finance LLC, as collateral agent, and the lendersparty thereto from time to time, including Oxford Finance LLC, dated as of June 30, 2016 (incorporated by reference to Exhibit 10.3 to theRegistrant’s quarterly report on Form 10-Q, filed with the SEC on August 5, 2016).10.19 Third Amendment to Loan and Security Agreement by and among Biocept, Inc., Oxford Finance LLC, as collateral agent, and the lenders partythereto from time to time, including Oxford Finance LLC, dated as of June 28, 2017 (incorporated by reference to Exhibit 10.2 of theRegistrant’s Quarterly Report on Form 10-Q, filed with the SEC on August 14, 2017).119Exhibit No. Description of Exhibit10.20+ Second Amendment to Employment Agreement by and between the Registrant and Michael W. Nall dated November 1, 2017 (incorporated byreference to Exhibit 10.22 of the Registrant’s Registration Statement on Form S-1 (File no. 333-221648), as amended, filed with the SEC onJanuary 22, 2018).10.21+ Biocept, Inc. Amended and Restated 2013 Equity Incentive Plan, Form of Stock Option Grant Notice, Option Agreement, Form of RestrictedStock Unit Grant Notice and Restricted Stock Unit agreement for use thereunder (incorporated by reference to Exhibit 99.1 of the Registrant’sRegistration Statement on Form S-8, filed with the SEC on October 19, 2018).10.22 Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, filed withthe SEC on March 18, 2019).23.1 Consent of Mayer Hoffman McCann P.C.31.1 Certification of Michael Nall, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2 Certification of Timothy Kennedy, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1* Certification of Michael Nall, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2* Certification of Timothy Kennedy, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.101.INS XBRL Instance Document101.SCH XBRL Taxonomy Extension Schema Document101.CAL XBRL Taxonomy Extension Calculation Linkbase Document101.DEF XBRL Taxonomy Extension Definition Linkbase Document101.LAB XBRL Taxonomy Extension Label Linkbase Document101.PRE XBRL Taxonomy Extension Presentation Linkbase Document +Indicates management contract or compensatory plan.*This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act, or otherwise subject to the liability of that section.Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Actof 1934, except to the extent that the registrant specifically incorporates it by reference.120SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized. BIOCEPT, INC. Date: March 28, 2019 By:/s/ Michael W. Nall Michael W. Nall Chief Executive Officer, President and DirectorKNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Michael W. Nall and TimothyC. Kennedy, and each and either of them, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, forhim or her and in his or her name, place and stead, in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same,with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all thateach of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on thedates indicated. Signature Title Date /s/ Michael W. Nall Chief Executive Officer, President and Director March 28, 2019Michael W. Nall (Principal Executive Officer) /s/ Timothy C. Kennedy Chief Financial Officer, Senior Vice President of Operations March 28, 2019Timothy C. Kennedy (Principal Financial Officer and Principal Accounting Officer) /s/ David F. Hale Chairman and Director March 28, 2019David F. Hale /s/ Marsha A. Chandler Director March 28, 2019Marsha A. Chandler /s/ Bruce E. Gerhardt Director March 28, 2019Bruce E. Gerhardt /s/ Bruce A. Huebner Director March 28, 2019Bruce A. Huebner /s/ Ivor Royston Director March 28, 2019Ivor Royston /s/ M. Faye Wilson Director March 28, 2019M. Faye Wilson 121Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM As independent registered public accountants, we hereby consent to the incorporation by reference in Registration Statement Nos. 333-194930, 333-202656,333-206347, 333-212960, 333-218018, 333-227267 and 333-227900 on Forms S-8, Registration Statement Nos. 333-224946 and 333-220048 on Forms S-3,and Registration Statement No. 333-227908 on Form S-1 of our report dated March 28, 2019, relating to the financial statements of Biocept, Inc.(“Company”) (which includes explanatory paragraphs related to the change in the method of accounting for revenue, and the uncertainty of the Company’sability to continue as a going concern), included in this Annual Report on Form 10-K for the year ended December 31, 2018./s/ Mayer Hoffman McCann P.C.San Diego, CaliforniaMarch 28, 2019 EXHIBIT 31.1CERTIFICATIONI, Michael W. Nall, certify that:1.I have reviewed this Annual Report on Form 10-K of Biocept, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: March 28, 2019 /s/ Michael W. Nall Michael W. NallChief Executive Officer, President and Director(Principal Executive Officer)  EXHIBIT 31.2CERTIFICATIONI, Timothy C. Kennedy, certify that:1.I have reviewed this Annual Report on Form 10-K of Biocept, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an report) that has materially affected, or is reasonably likely to materiallyaffect, the registrant’s internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controlover financial reporting.Date: March 28, 2019 /s/ Timothy C. Kennedy Timothy C. KennedyChief Financial Officer, Senior Vice President of Operations(Principal Financial and Accounting Officer)  EXHIBIT 32.1CERTIFICATIONI, Michael W. Nall, hereby certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that, tomy knowledge, the Annual Report on Form 10-K of Biocept, Inc. for the fiscal year ended December 31, 2018 (the “Report”) fully complies with therequirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all materialrespects, the financial condition and results of operations of Biocept, Inc. Date: March 28, 2019 /s/ Michael W. Nall Michael W. Nall Chief Executive Officer, President and Director(Principal Executive Officer)This certification accompanies the Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C.Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934.  EXHIBIT 32.2CERTIFICATIONI, Timothy C. Kennedy, hereby certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that,to my knowledge, the Annual Report on Form 10-K of Biocept, Inc. for the fiscal year ended December 31, 2018 (the “Report”) fully complies with therequirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all materialrespects, the financial condition and results of operations of Biocept, Inc. Date: March 28, 2019 /s/ Timothy C. Kennedy Timothy C. Kennedy Chief Financial Officer, Senior Vice President of Operations (Principal Financial and Accounting Officer)This certification accompanies the Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C.Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934. 

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