Veracyte

VERACYTE, INC.

FORM 10-K
(Annual Report)

Filed 03/14/16 for the Period Ending 12/31/15

Address

Telephone
CIK
Symbol
SIC Code
Fiscal Year

6000 SHORELINE COURT, SUITE 300
SOUTH SAN FRANCISCO, CA 94080
(650) 243-6300
0001384101
VCYT
8071 - Medical Laboratories
12/31

http://www.edgar-online.com
© Copyright 2016, EDGAR Online, Inc. All Rights Reserved.
Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

  
  
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these
links
to
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review
the
document
TABLE
OF
CONTENTS
ITEM
8.
FINANCIAL
STATEMENTS
AND
SUPPLEMENTARY
DATA
Table
of
ContentsUNITED
STATES
SECURITIES
AND
EXCHANGE
COMMISSION
Washington,
D.C.
20549Form
10-KCommission
File
Number
001-36156VERACYTE,
INC.
(Exact
Name
of
Registrant
as
Specified
in
its
Charter)Delaware
(State
or
Other
Jurisdiction
of
Incorporation
orOrganization)
20-5455398
(I.R.S.
Employer
Identification
Number)6000
Shoreline
Court,
Suite
300
South
San
Francisco,
California
94080
(Address
of
Principal
Executive
Offices,
Including
Zip
Code)(650)
243-6300
(Registrant's
Telephone
Number,
Including
Area
Code)








Securities
Registered
Pursuant
to
Section
12(b)
of
the
Act:Title
of
Each
Class
Name
of
Each
Exchange
on
Which
RegisteredCommon
Stock,
par
value
$0.001
pershare
The
NASDAQ
Stock
Market
LLC








Securities
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

o




No

ý








Indicate
by
check
mark
if
the
registrant
is
not
required
to
file
reports
pursuant
to
Section
13
or
15(d)
of
the
Act.
Yes

o




No

ý








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
1934during
the
preceding
12
months
(or
for
such
shorter
period
that
the
registrant
was
required
to
file
such
reports),
and
(2)
has
been
subject
to
such
filing
requirementsfor
the
past
90
days.
Yes

ý




No

o








Indicate
by
check
mark
whether
the
registrant
has
submitted
electronically
and
posted
on
its
corporate
Web
site,
if
any,
every
Interactive
Data
File
required
tobe
submitted
and
posted
pursuant
to
Rule
405
of
Regulation
S-T
during
the
preceding
12
months
(or
for
such
shorter
period
that
the
registrant
was
required
tosubmit
and
post
such
files).
Yes

ý




No

o








Indicate
by
check
mark
if
disclosure
of
delinquent
filers
pursuant
to
Item
405
of
Regulation
S-K
is
not
contained
herein,
and
will
not
be
contained,
to
the
bestof
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.

ý(Mark
One)

ý
ANNUAL
REPORT
PURSUANT
TO
SECTION
13
OR
15(d)
OF
THE
SECURITIES
EXCHANGE
ACTOF
1934For
the
fiscal
year
ended
December
31,
2015o
TRANSITION
REPORT
PURSUANT
TO
SECTION
13
OR
15(d)
OF
THE
SECURITIES
EXCHANGE
ACTOF
1934For
the
transition
period
from













to





















Indicate
by
check
mark
whether
the
registrant
is
a
large
accelerated
filer,
an
accelerated
filer,
a
non-accelerated
filer,
or
a
smaller
reporting
company.
See
thedefinitions
of
"large
accelerated
filer,"
"accelerated
filer"
and
"smaller
reporting
company"
in
Rule
12b-2
of
the
Exchange
Act.
(Check
one):








Indicate
by
check
mark
whether
the
registrant
is
a
shell
company
(as
defined
in
Rule
12b-2
of
the
Exchange
Act).
Yes

o




No

ý








As
of
June
30,
2015,
the
aggregate
market
value
of
voting
and
non-voting
common
stock
held
by
non-affiliates
of
the
registrant
was
approximately$151.4
million,
based
on
the
closing
price
of
the
common
stock
as
reported
on
The
NASDAQ
Global
Market
for
that
date.








The
number
of
shares
of
the
registrant's
Common
Stock
outstanding
as
of
March
4,
2016
was
27,854,567.DOCUMENTS
INCORPORATED
BY
REFERENCE








Item
10
(as
to
directors
and
Section
16(a)
Beneficial
Ownership
Reporting
Compliance),
11,
12,
13
and
14
of
Part
III
incorporate
by
reference
informationfrom
the
registrant's
proxy
statement
to
be
filed
with
the
Securities
and
Exchange
Commission
in
connection
with
the
solicitation
of
proxies
for
the
registrant's2016
Annual
Meeting
of
Stockholders
to
be
held
on
June
17,
2016.


Large
accelerated
filer

o
Accelerated
filer

ý
Non-accelerated
filer

o
(Do
not
check
if
a
smaller
reporting
company)
Smaller
reporting
company

oTable
of
ContentsTABLE
OF
CONTENTS
Item
No.
Page
No.
PART
I



Item
1.
Business

1
Item
1A.
Risk
Factors

38
Item
1B.
Unresolved
Staff
Comments

62
Item
2.
Properties

62
Item
3.
Legal
Proceedings

62
Item
4.
Mine
Safety
Disclosure

62
PART
II



Item
5.
Market
for
Registrant's
Common
Equity,
Related
Stockholder
Matters
and
Issuer
Purchases
of
EquitySecurities

64
Item
6.
Selected
Financial
Data

66
Item
7.
Management's
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations

68
Item
7A.
Quantitative
and
Qualitative
Disclosures
About
Market
Risk

87
Item
8.
Financial
Statements
and
Supplementary
Data

88
Item
9.
Changes
in
and
Disagreements
with
Accountants
on
Accounting
and
Financial
Disclosure

123
Item
9A.
Controls
and
Procedures

123
Item
9B.
Other
Information

124
PART
III



Item
10.
Directors,
Executive
Officers
and
Corporate
Governance

125
Item
11.
Executive
Compensation

129
Item
12.
Security
Ownership
of
Certain
Beneficial
Owners
and
Management
and
Related
Stockholder
Matters

135
Item
13.
Certain
Relationships
and
Related
Transactions,
and
Director
Independence

139
Item
14.
Principal
Accountant
Fees
and
Services

139
PART
IV



Item
15.
Exhibits,
Financial
Statement
Schedules

141
SIGNATURES

146
Table
of
ContentsPART
I
ITEM
1.



BUSINESS
BUSINESS








This
report
contains
forward-looking
statements
within
the
meaning
of
the
Private
Securities
Litigation
Reform
Act
of
1995.
When
used
in
this
report,
thewords
"expects,"
"anticipates,"
"intends,"
"estimates,"
"plans,"
"believes,"
"continuing,"
"ongoing,"
and
similar
expressions
are
intended
to
identify
forward-looking
statements.
These
are
statements
that
relate
to
future
events
and
include,
but
are
not
limited
to,
the
factors
that
may
impact
our
financial
results;
ourexpectations
regarding
revenue;
our
expectations
with
respect
to
our
future
research
and
development,
general
and
administrative
and
selling
and
marketingexpenses
and
our
anticipated
uses
of
our
funds;
our
expectations
regarding
capital
expenditures;
our
anticipated
cash
needs
and
our
estimates
regarding
our
capitalrequirements;
our
need
for
additional
financing;
potential
future
sources
of
cash;
our
business
strategy
and
our
ability
to
execute
our
strategy;
our
ability
to
achieveand
maintain
reimbursement
from
third-party
payers
at
acceptable
levels;
the
estimated
size
of
the
global
markets
for
our
tests
and
our
future
tests;
the
potentialbenefits
of
our
tests
and
any
future
tests
we
may
develop
to
patients,
physicians
and
payers;
the
factors
we
believe
drive
demand
for
and
reimbursement
of
ourtests;
our
ability
to
sustain
or
increase
demand
for
our
tests;
our
intent
to
expand
into
other
clinical
areas;
our
ability
to
develop
new
tests,
including
tests
forinterstitial
lung
disease,
and
the
timeframes
for
development
or
commercialization;
our
ability
to
get
our
data
and
clinical
studies
accepted
in
peer-reviewedpublications;
our
dependence
on
and
the
terms
of
our
agreements
with
Genzyme
and
TCP,
and
on
other
strategic
relationships,
and
the
success
of
thoserelationships;
our
beliefs
regarding
our
laboratory
capacity;
the
applicability
of
clinical
results
to
actual
outcomes;
our
expectations
regarding
our
internationalexpansion,
including
entering
new
international
markets
and
the
timing
thereof;
the
occurrence,
timing,
outcome
or
success
of
clinical
trials
or
studies;
the
abilityof
our
tests
to
impact
treatment
decisions;
our
beliefs
regarding
our
competitive
position;
our
ability
to
compete
with
potential
competitors;
our
compliance
withfederal,
state
and
international
regulations;
the
potential
impact
of
regulation
of
our
tests
by
the
FDA
or
other
regulatory
bodies;
the
impact
of
new
or
changingpolicies,
regulation
or
legislation,
or
of
judicial
decisions,
on
our
business;
our
ability
to
comply
with
the
requirements
of
being
a
public
company;
the
impact
ofseasonal
fluctuations
and
economic
conditions
on
our
business;
our
belief
that
we
have
taken
reasonable
steps
to
protect
our
intellectual
property;
the
impact
ofaccounting
pronouncements
and
our
critical
accounting
policies,
judgments,
estimates,
models
and
assumptions
on
our
financial
results;
and
anticipated
trends
andchallenges
in
our
business
and
the
markets
in
which
we
operate.







Forward-looking
statements
are
based
on
our
current
plans
and
expectations
and
involve
risks
and
uncertainties
which
could
cause
actual
results
to
differmaterially.
These
risks
and
uncertainties
include,
but
are
not
limited
to,
those
risks
discussed
in
Part
I,
Item
1A
of
this
report,
as
well
as
risks
and
uncertaintiesrelated
to:
our
limited
operating
history
and
history
of
losses
since
inception;
our
ability
to
increase
usage
of
and
reimbursement
for
our
tests
and
any
other
tests
wemay
develop;
our
dependence
on
a
limited
number
of
payers
for
a
significant
portion
of
our
revenue;
the
complexity,
time
and
expense
associated
with
billing
andcollecting
for
our
test;
current
and
future
laws,
regulations
and
judicial
decisions
applicable
to
our
business,
including
potential
regulation
by
the
FDA
or
byregulatory
bodies
outside
of
the
United
States;
changes
in
legislation
related
to
the
U.S.
healthcare
system;
our
dependence
on
strategic
relationships,collaborations
and
co-promotion
arrangements;
unanticipated
delays
in
research
and
development
efforts;
our
ability
to
develop
and
commercialize
new
productsand
the
timing
of
commercialization;
our
ability
to
successfully
enter
new
product
or
geographic
markets;
our
ability
to
conduct
clinical
studies
and
the
outcomesof
such
clinical
studies;
the
applicability
of
clinical
results
to
actual
outcomes;
trends
and
challenges
in
our
business;
our
ability
to
compete
against
othercompanies
and
products;
our
ability
to
protect
our
intellectual
property;
and
our
ability
to
obtain
capital
when
needed.
These
forward-looking
statements
speakonly
as
of
the
date
hereof.
We
expressly
disclaim
any
obligation
or
undertaking
to
update
any
forward-looking
statements
contained
herein
to
reflect
any
change
inour1Table
of
Contentsexpectations
with
regard
thereto
or
any
change
in
events,
conditions
or
circumstances
on
which
any
such
statement
is
based.







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







Veracyte,
Afirma,
Percepta,
the
Veracyte
logo
and
the
Afirma
logo
are
our
trademarks.
We
also
refer
to
trademarks
of
other
corporations
or
organizations
inthis
report.







This
annual
report
contains
statistical
data
and
estimates
that
we
obtained
from
industry
publications
and
reports.
These
publications
typically
indicate
thatthey
have
obtained
their
information
from
sources
they
believe
to
be
reliable,
but
do
not
guarantee
the
accuracy
and
completeness
of
their
information.
Some
datacontained
in
this
annual
report
is
also
based
on
our
internal
estimates.
Although
we
have
not
independently
verified
the
third-party
data,
we
are
responsible
for
itsinclusion
in
the
annual
report
and
believe
it
to
be
reasonable.Overview







We
are
a
molecular
diagnostics
company
that
uses
novel
genomics
to
resolve
the
critical
healthcare
problem
of
diagnostic
ambiguity.
We
believe
thatdiagnostic
ambiguity
results
in
hundreds
of
thousands
of
patients
undergoing
unnecessary,
invasive
procedures
and
wasting
billions
of
healthcare
dollars
each
year.We
target
diseases
in
which
large
numbers
of
patients
undergo
invasive
and
costly
diagnostic
procedures
that
could
be
avoided
with
a
more
accurate
diagnosisfrom
a
cytology
sample
taken
preoperatively.
By
improving
diagnosis
preoperatively,
we
help
patients
avoid
such
unnecessary
invasive
procedures
and
surgerieswhile
reducing
healthcare
costs.
Since
Veracyte's
founding
in
2008,
we
have
evolved
this
concept
into
an
enterprise
with
two
commercialized
products
and
a
thirdscheduled
to
launch
in
the
fourth
quarter
of
2016,
with
approximately
$50
million
in
annual
revenue
in
2015
and
a
near-term
addressable
market
of
over
$2
billion.In
2016,
we
are
focused
on
the
continued
growth
of
our
endocrinology
franchise
and
further
expansion
into
pulmonology,
our
second
clinical
indication,
using
ourproven
approach
to
genomic
test
development
and
commercialization.







We
launched
our
first
commercial
solution,
the
Afirma®
Thyroid
FNA
Analysis,
in
2011
for
use
in
thyroid
cancer
diagnosis.
Our
offering
centers
on
ourproprietary
Afirma
Gene
Expression
Classifier,
or
GEC,
which
is
used
to
resolve
diagnostic
ambiguity
among
the
more
than
525,000
patients
who
undergo
fineneedle
aspiration,
or
FNA,
biopsies
each
year
in
the
United
States
to
assess
potentially
cancerous
thyroid
nodules.
The
Afirma
GEC
helps
physicians
reduce
thenumber
of
unnecessary
surgeries
by
employing
a
proprietary
142-gene
signature
to
preoperatively
determine
whether
thyroid
nodules
previously
classified
bycytopathology
as
indeterminate
can
be
reclassified
as
benign.
An
additional
25
genes
are
used
to
differentiate
uncommon
neoplasm
subtypes.
As
of
March
2016,we
have
received
more
than
225,000
FNA
samples
and
have
performed
more
than
50,000
Afirma
GEC
tests
to
resolve
indeterminate
cytopathology
results,helping
over
20,000
patients
potentially
avoid
unnecessary
surgery
and
reducing
healthcare
costs
by
an
estimated
$400
million.
We
estimate
that
our
marketpenetration
has
doubled
in
the
last
two
years,
to
approximately
25%,
based
on
the
number
of
Afirma
GEC
tests
performed
relative
to
an
18%
rate
of
indeterminateresults
among
the
estimated
525,000
FNAs
performed
each
year
in
the
United
States.
We
launched
our
first
product
extension—the
Afirma
Malignancy
Classifiers—in
2014,
which
comprise
genomic
tests
for
medullary
thyroid
cancer,
or
MTC,
and
BRAF
V600E
mutation
status.
These
genomic
tests
are
intended
topreoperatively
inform
physicians'
choice
of
thyroid
surgery
when
surgery
is
needed.
We
believe
Afirma
offers
the
most
comprehensive,
proven
solution
for
theassessment
and
management
of
patients
with
thyroid
nodules.
We
estimate
our
addressable
thyroid
market
opportunity
today
is
approximately
$500
million
peryear
in
the
United
States,
and
we
believe
that
there
is
an
estimated
$300
million
additional
market
opportunity
for
the
Afirma
GEC
internationally.







The
Afirma
GEC
is
now
supported
by
nearly
20
peer-reviewed,
published
scientific
studies
and
we
believe
it
is
becoming
a
new
standard
of
care
in
thyroidcancer
diagnosis.
A
prospective,
multicenter,2Table
of
Contentsdouble-blind
clinical
validation
study
was
published
in
The New England Journal of Medicine in
2012
and
suggested
that
the
test
can
reduce
the
number
ofunnecessary
surgeries
by
50%.
As
of
March
2016,
the
Afirma
GEC
is
included
in
all
of
the
recently
updated
thyroid-focused
clinical
practice
guidelines
and
iscovered
by
positive
medical
policies
for
nearly
180
million
patient
lives
in
the
United
States,
including
through
Medicare
and
many
commercial
insurance
plans.Additionally,
we
have
established
contracts
with
numerous
health
plans,
making
the
Afirma
GEC
an
in-network
service
for
nearly
130
million
lives.
These
includeMedicare,
UnitedHealthcare,
Cigna,
Aetna
and
several
Blue
Cross
Blue
Shield
plans.







We
market
our
Afirma
solution
through
our
dedicated
specialty
sales
force
and,
until
mid-September
2016,
under
a
co-promotion
agreement
with
Genzyme,
asubsidiary
of
Sanofi,
which
targets
the
same
endocrinologist
customers
with
Thyrogen®.
In
March
2016,
we
notified
Genzyme
that
we
will
conclude
our
co-promotion
agreement
with
them
and
assume
full
responsibility
for
Afirma
sales
and
marketing,
while
ending
our
payments
of
15%
of
all
U.S.
Afirma
sales.
Webelieve
our
growing
sales
force
enables
us
to
further
drive
market
penetration
and
expansion
for
Afirma,
in
the
physician
office,
or
ambulatory
practice
setting,
aswell
as
in
regional
laboratories,
which
we
believe
allows
us
to
further
penetrate
the
community
physician
market.
Our
customers
also
include
radiology
clinics
andinstitutional
accounts,
including
integrated
delivery
networks,
or
IDNs.
We
now
offer
sales
models
that
meet
the
needs
of
our
diverse
customer
base,
and
webelieve
we
are
positioned
to
continue
to
drive
growth
in
all
of
these
markets.
To
date,
substantially
all
of
our
revenue
has
been
derived
from
customers
we
serve
inthe
United
States.
Our
revenue
has
increased
from
$11.6
million
in
2012,
to
$21.9
million
in
2013,
$38.2
million
in
2014
and
$49.5
million
in
2015.







In
April
2015,
we
accelerated
our
entry
into
pulmonology,
our
second
clinical
area,
with
the
launch
of
the
Percepta®
Bronchial
Genomic
Classifier.
ThePercepta
test
is
designed
to
improve
the
preoperative
diagnosis
of
lung
cancer,
thus
helping
to
reduce
unnecessary
invasive,
risky
and
costly
procedures
amongpatients
with
suspicious
lung
nodules
and
lesions
that
were
initially
found
on
CT
scans.
Lung
nodules
are
often
difficult
to
diagnose
without
invasive
biopsies.Bronchoscopy,
however,
offers
a
nonsurgical
way
to
diagnose
such
suspicious
lung
nodules
and
lesions
and
is
performed
on
approximately
250,000
patients
in
theUnited
States
each
year
for
this
purpose.
However,
approximately
40%
of
bronchoscopy
procedures
produce
inconclusive
results,
leaving
physicians
with
adiagnostic
dilemma
of
whether
to
subject
patients
to
invasive
and
potentially
unnecessary
procedures
or
just
monitor
them,
with
the
chance
that
they
may
havecancer.
Our
initial
focus
is
on
building
our
library
of
clinical
evidence,
including
clinical
utility,
for
the
Percepta
classifier,
while
we
secure
coverage
fromMedicare
and
private
payers.
As
of
March
2016,
we
have
expanded
the
number
of
thought-leading
academic
and
other
institutions
to
40
that
are
now
offeringPercepta
to
their
patients
during
this
initial
stage
of
commercialization.







We
believe
the
market
opportunity
for
the
Percepta
Bronchial
Genomic
Classifier
is
between
$350
million
and
$400
million
in
the
United
States,
dependingon
the
value
we
can
extract
for
our
test.
We
estimate
that
the
number
of
bronchoscopies—and
inconclusive
results—could
expand
significantly
in
the
next
two
tothree
years
as,
beginning
in
early
2015,
more
than
eight
million
Americans
at
high
risk
for
lung
cancer
have
become
eligible
for
annual
screening
through
theAffordable
Care
Act
and
Medicare
coverage.







Clinical
validation
data
from
two
multicenter,
prospective
studies—AEGIS
I
and
II—were
published
in
July
2015
in
The New England Journal of Medicineand
showed
that
the
Percepta
classifier
had
a
negative
predictive
value,
or
NPV,
of
91%,
demonstrating
the
test's
ability
to
reclassify
patients
as
low
risk,
with
ahigh
degree
of
accuracy,
following
an
inconclusive
bronchoscopy
result.
The
authors
concluded
that
these
patients
could
potentially
be
monitored
with
CT
scans,rather
than
face
invasive
diagnostic
procedures.
The
AEGIS
data
also
showed
that
use
of
the
Percepta
classifier
increased
the
sensitivity
of
bronchoscopy
from75%
to
97%,
suggesting
that
it
could
potentially
improve
the
clinical
utility
of
this
nonsurgical
procedure.
Clinical
validation
data
from
a
third
study
werepublished
in
May
2015
in
BMC Medical Genomics and
similarly
showed
an
NPV
for
the
Percepta
test
of
greater
than
90%.
Additionally,
initial
clinical
utility
data,derived
from
the
AEGIS
trials,
were
published
in
February
2016
online
in
CHEST ,
the3Table
of
Contentsofficial
journal
of
the
American
College
of
Chest
Physicians.
These
data
suggest
that
use
of
the
Percepta
test
could
have
decreased
unnecessary,
invasiveprocedures
by
50%
in
the
evaluated
patient
population.
Also
in
February
2016,
analytical
verification
data
for
the
Percepta
classifier
were
published
online
in
BMCCancer, establishing
the
quality
and
reproducibility
of
our
testing
processes.
We
expect
to
expand
the
library
of
clinical
evidence
supporting
the
adoption
andreimbursement
of
the
Percepta
test
in
2016.







We
also
plan
to
expand
our
footprint
in
pulmonology
in
2016
with
the
launch
of
a
product
designed
to
preoperatively
identify
idiopathic
pulmonary
fibrosis,or
IPF,
among
patients
presenting
with
a
suspected
interstitial
lung
disease,
or
ILD.
Our
IPF
test
will
target
pulmonologists,
the
same
physicians
with
the
Perceptatest,
and
will
also
test
cytology
samples
obtained
through
bronchoscopy.
IPF
is
the
most
common
form
of
ILD,
a
group
of
diseases
characterized
by
chronic,progressive
scarring
of
the
lungs,
and
is
often
difficult
to
distinguish
from
other
ILDs.
Currently,
many
of
the
estimated
175,000
to
200,000
patients
in
the
UnitedStates
and
Europe
who
present
with
suspected
ILDs
each
year
may
endure
months
of
incorrect
or
missed
diagnoses,
undergoing
invasive,
risky
and
expensivediagnostic
surgeries,
or
receiving
suboptimal
treatment.
The
need
for
improved
IPF
diagnosis
is
increasingly
important
given
the
availability
of
new
therapies
tohalt
or
slow
progression
of
this
often-fatal
disease,
which
were
approved
by
the
Food
and
Drug
Administration,
or
FDA,
in
late
2014.
We
estimate
the
addressablemarket
for
our
IPF
test
to
be
over
$500
million
in
the
United
States
and
Europe.







We
presented
data
at
the
American
Thoracic
Society
International
Conference
in
May
2015
and
at
the
Pulmonary
Fibrosis
Foundation,
or
PFF,
Summit
2015:From
Bench
to
Bedside
in
November
demonstrating
the
ability
of
our
in-development
molecular
classifier
to
help
distinguish
IPF
from
other
ILDs
on
samplesobtained
through
bronchoscopy.
In
May
2015,
The Lancet Respiratory Medicine also
published
an
article
online,
which
detailed
foundational
work
in
the
test'sdevelopment
and
results
from
an
independent
test
set,
demonstrating
the
classifier's
performance
using
patient
samples
obtained
through
surgery.
We
are
workingwith
key
leading
thought
leaders
and
more
than
25
sites
across
the
United
States
and
Europe
to
finalize
development
of
our
classifier
test
and
unveil
validationresults
from
multicenter,
prospective
clinical
validation
studies.
We
expect
to
initiate
commercialization
in
the
fourth
quarter
of
2016.







We
believe
additional
clinical
areas
offer
opportunities
for
future
expansion
of
our
molecular
cytology
franchise
beyond
endocrinology
and
pulmonology.
Indetermining
new
clinical
areas
to
enter,
we
will
focus
on
diseases
in
which
a
large
number
of
patients
undergo
invasive
and
costly
diagnostic
procedures
that
couldbe
avoided
with
a
more
accurate
diagnosis
from
a
cytology
sample
taken
preoperatively.Our
Strategy







We
believe
the
market
opportunities
are
significant
and
have
focused
our
strategic
objectives
around
these
four
growth
vectors:•Accelerate the Growth of Afirma in Endocrinology. 

We
expect
to
continue
to
invest
in
driving
the
adoption
of
Afirma
and
expanding
our
base
ofprescribing
physicians,
both
in
the
community
physician
office
market
as
well
as
in
institutional
settings,
offering
flexible
models
that
address
ourcustomers'
diverse
needs.
We
plan
to
continue
to
leverage
and
expand
our
sales
force,
comprised
of
endocrine
product
specialists,
account
managersand
institutional
channel
managers
in
the
U.S.
market,
as
we
transition
from
our
co-promotion
relationship
with
Genzyme.
We
also
intend
to
pursueselect
international
markets
for
entry
where
attractive
regulations
and
reimbursement
exists.
We
plan
to
use
our
inclusion
in
clinical
practiceguidelines
and
the
extensive
library
of
published
evidence
on
Afirma
to
date,
coupled
with
our
core
expertise
in
managed
care,
claims
adjudication,and
billing,
to
drive
even
broader
coverage
determinations
and
to
convert
coverage
determinations
into
additional
in-network
contracts
with
payers,in
order
to
expand
adoption
and
reimbursement.
•Broaden the Launch of Percepta. 

We
believe
our
molecular
cytology
strategy
could
address
several
unmet
clinical
needs
in
pulmonology.
Wecommercially
launched
our
Percepta
Bronchial
Genomic4Table
of
ContentsClassifier,
designed
to
improve
lung
cancer
diagnosis,
in
April
2015
and
plan
to
continue
to
secure
adoption
by
leading
institutions
as
we
build
ourlibrary
of
clinical
evidence,
including
additional
clinical
utility
data,
and
work
to
secure
Medicare
and
private-payer
reimbursement.
Uponobtaining
Medicare
reimbursement,
we
plan
to
scale
our
sales
and
marketing
efforts,
to
secure
customers
nationwide,
beyond
the
approximately
50thought-leader
sites
originally
targeted
for
the
first
phase
of
our
launch.•Expand Pulmonology Offering with Launch of Our IPF Test. 

We
plan
to
further
expand
our
molecular
cytology
platform
within
the
pulmonologyvertical
with
the
introduction
of
a
test
to
improve
the
diagnosis
of
patients
suspicious
for
ILD,
specifically
IPF.
To
support
the
IPF
test'sintroduction,
we
plan
to
complete
clinical
validation
work
demonstrating
its
performance
on
patient
samples
collected
prospectively
from
more
than25
clinical
sites
around
the
United
States
and
Europe.
We
plan
to
commercially
introduce
the
test
in
the
fourth
quarter
of
2016.
Similar
to
ourapproach
with
Afirma
and
Percepta,
we
plan
to
focus
on
initial
adoption
among
leading
sites
as
we
further
build
out
the
clinical
evidence,
includingclinical
utility
data,
for
the
test
and
work
to
secure
reimbursement
from
Medicare
and
private
payers.
•Expand Our Franchise into Additional Indications with Diagnostic Ambiguity. 

We
intend
to
leverage
our
demonstrated
core
capabilities
inresearch
and
development,
clinical
development,
and
managed
care
and
reimbursement
to
expand
our
business
into
other
clinical
areas
of
unmetneed,
where
we
can
resolve
diagnostic
ambiguity,
either
through
internal
development
or
through
acquisition.
For
each
clinical
area
we
target,
wedeploy
a
proven
strategy
comprised
of
four
key
pillars:
•Inform the Right Clinical Question .



We
focus
on
developing
genomic
tests
that
answer
a
relevant
clinical
question
and
that,
when
used
atthe
optimal
point
in
the
diagnostic
pathway,
provide
physicians
with
information
that
can
significantly
alter
physician
decision-making,enabling
patients
to
avoid
unnecessary
invasive
and
costly
procedures.
We
then
work
with
key
opinion
leaders
and
other
clinicians
tounderstand
the
performance
criteria
that
will
be
needed
for
a
new
test
to
give
physicians
confidence
to
change
clinical-care
decisions.
Onlywhen
we
have
pinpointed
this
information
do
we
then
deploy
the
appropriate
science
to
develop
the
test.
•Develop Proprietary Science and Validate in Well-designed Clinical Trials .



Once
we
know
the
parameters
of
the
test
we
need
to
developto
change
patient
care,
we
apply
rich,
broad-based
genomic
science
based
on
our
expertise
in
biomarker
discovery
and
algorithmdevelopment.
We
utilize
proprietary
technology,
intellectual
property
and
scientific
know-how
to
extract
rich
genomic
information
fromtiny
cytology
samples,
sometimes
with
only
nanogram
quantities
of
biological
material,
to
answer
our
target
clinical
question.
We
thenconduct
prospective,
blinded,
multicenter
clinical
validation
studies
and
seek
to
obtain
publication
in
peer-reviewed
journals
to
establish
theclinical
performance
of
our
test.
•Demonstrate Clear Value .



We
build
into
our
commercialization
strategy
the
steps
that
will
be
needed
to
prove
that
our
tests
do
indeedchange
clinical
practice
and
provide
healthcare
cost
savings.
To
do
this,
we
design
and
initiate
clinical
utility
and
cost-effectiveness
studiesearly
in
the
process
so
that
we
will
be
able
to
quickly
and
efficiently
demonstrate
value
to
physicians
and
payers.
•Achieve Coverage and Reimbursement Success .



By
developing
the
clinical
evidence
for
our
tests,
which
is
then
published
in
peer-reviewed
journals,
we
create
compelling
evidence
for
our
tests
to
be
included
in
clinical
practice
guidelines,
helping
to
establish
a
newroutine
standard
of
care.
We
believe
guideline
inclusion,
along
with
the
capabilities
we
have
built
in
managed
care
and
claims
adjudication,is
key
to
obtaining
successful
payer
coverage,
contracts
and
reimbursement.
Our
team
combines
expertise
in
advocating
for
positivecoverage
decisions5Table
of
Contentswith
specific
insights
into
what
tactical
steps
will
maximize
reimbursement
from
each
payer.
As
a
result,
we
have
developed
detailed
knowledge
ofthe
intricacies
of
specific
payer
practices
and
requirements,
which
informs
and
allows
us
to
leverage
our
strategy
across
indication
selection,
clinicalstudy
design,
marketing
and
sales.Limitations
of
Disease
Diagnosis
Today







Surgical
pathology
has
long
been
part
of
the
standard
of
care
for
diagnosis
of
numerous
complex
diseases,
including
many
types
of
cancer
and
lung
diseases.Patient
samples
collected
from
surgeries
allow
multiple
slices,
or
sections,
of
the
tissue
to
be
stained,
permitting
a
pathologist
to
use
a
microscope
to
evaluate
theshape
and
structure
of
the
cells
in
question
to
diagnose
the
sample.
However,
surgical
pathology
by
definition
requires
an
invasive
procedure.
Cytopathology,
orthe
analysis
of
small
numbers
of
cells
using
minimally
invasive
methods
(which
we
refer
to
as
cytology
samples),
is
designed
to
provide
a
pathologic
diagnosisusing
a
small
biopsy.
It
is
often
the
first
step
in
the
diagnostic
process
because
it
offers
a
less-invasive
and
cost-effective
alternative
to
surgery.
However,
becausecytology
samples
are
often
small
and
non-uniform,
definitive
diagnoses
can
be
difficult.
In
some
cases,
physicians
may
forego
less-invasive
procedures
to
obtaincytology
samples
because
they
do
not
believe
they
will
yield
diagnostic
results.
Moreover,
the
high
rate
of
ambiguity
in
diagnosis
using
cytology
samples
todayresults
in
many
patients
undergoing
other
subsequent
invasive
procedures,
often
including
surgery,
to
obtain
an
accurate
diagnosis.







The
role
of
genomic
information
in
medical
practice
is
evolving
rapidly
and
has
affected
the
diagnosis
of
disease
as
well
as
treatment
decisions.
Over
the
pastdecade,
molecular
diagnostic
tests
that
analyze
genomic
material
from
surgical
tissue
samples
have
emerged
as
an
important
complement
to
evaluations
performedby
pathologists.
Information
at
the
molecular
level
enables
one
to
understand
more
fully
the
makeup
and
specific
subtype
of
disease
to
improve
diagnosis.
In
manycases,
the
genomic
information
derived
from
these
samples
can
help
guide
treatment
decisions
as
part
of
the
standard
of
care.
However,
due
to
limitations
ofavailable
technologies,
many
of
these
molecular
tests
require
relatively
large
quantities
of
tissue
with
specific
levels
of
cellularity,
which
most
often
must
beobtained
through
an
invasive
surgical
procedure.







Cytology
samples
offer
a
more
attractive
alternative
for
early,
less
invasive
and
less
costly
diagnosis.
These
samples
are
commonly
obtained
using
minimallyinvasive
methods,
such
as
FNA
biopsies,
washings,
brushings,
lavages
or
bronchoscopy
biopsies,
from
which
to
diagnose
various
diseases.
Physicians
typicallycollect
these
samples
without
performing
surgery,
and
therefore
have
the
potential
to
offer
a
lower
cost
and
less
invasive
approach
to
disease
diagnosis.
Cytologysamples,
however,
are
challenging
for
both
traditional
cytopathology,
as
well
as
molecular
cytology,
due
to
the
small
amount
of
cellular
material
obtained
in
thecollection
process
and
the
often
non-uniform
nature
of
the
collected
tissue.







Extracting
clinically
meaningful
genomic
information
from
these
small,
heterogeneous
cytology
samples
offers
the
potential
to
reduce
ambiguity
in
diagnosisprior
to
surgery
and
inform
treatment
decisions
at
a
much
lower
cost
to
the
healthcare
system.Our
Solutions







We
are
developing
and
delivering
genomic
solutions
that
resolve
diagnostic
ambiguity
and
enable
physicians
to
make
more
informed
treatment
decisions
at
anearly
stage
in
patient
care.
We
target
diseases
in
which
a
large
number
of
patients
undergo
invasive
and
costly
diagnostic
procedures
that
could
be
avoided
with
amore
accurate
diagnosis
from
a
cytology
sample
taken
preoperatively.
In
contrast
to
molecular
diagnostics
developed
for
surgical
tissue,
our
solutions
solve
manyof
the
technical
challenges
associated
with
generating
analytically
valid
and
clinically
relevant
genomic
information
from
very
small,
heterogeneous
cytologysamples.
By
improving
diagnosis
before
surgery,
we
help
patients
avoid
unnecessary
invasive
procedures
while
reducing
healthcare
costs.6Table
of
Contents







Our
molecular
cytology
solutions
are
designed
to
deliver
a
number
of
benefits
to
physicians,
payers
and
patients,
including
a
reduction
of
unnecessarysurgeries,
lower
healthcare
costs,
and
actionable
information
by
integrating
our
genomic
tests
into
the
diagnostic
clinical
pathway
that
is
the
standard
of
care
today.







Our
initial
focus
is
on
the
clinical
areas
of
endocrinology,
where
we
have
made
significant
inroads
to
date,
and
pulmonology,
which
we
entered
in
mid-2015.Together,
we
believe
these
two
market
opportunities
offer
a
near-term
estimated
addressable
market
of
over
$2
billion.Our Endocrinology Solution







We
entered
the
endocrinology
market
in
January
2011
with
our
Afirma
Thyroid
FNA
Analysis,
which
is
now
included
in
leading
practice
guidelines
andgaining
market
share
in
thyroid
cancer
diagnosis.
Our
offering
centers
on
our
proprietary
Afirma
GEC,
which
is
used
to
resolve
diagnostic
ambiguity
among
themore
than
525,000
patients
who
undergo
FNA
procedures
each
year
to
assess
thyroid
nodules
that
are
potentially
cancerous.
We
launched
our
first
productextension—the
Afirma
Malignancy
Classifiers—in
May
2014,
comprising
tests
for
MTC
and
BRAF
V600E
gene
mutation
status
to
provide
results
that
mightpreoperatively
inform
surgery
selection
for
those
patients
who
need
surgery.







As
of
March
2016,
we
have
received
more
than
225,000
FNA
samples
and
have
performed
more
than
50,000
GEC
tests
to
resolve
indeterminatecytopathology
results,
helping
over
20,000
patients
avoid
unnecessary
surgery
and
reducing
healthcare
costs
by
an
estimated
$400
million.
The
Afirma
GEC
iscovered
as
a
medically
necessary
test
for
nearly
180
million
lives,
including
through
Medicare
and
many
commercial
payers
including
UnitedHealthcare,
Cigna,Aetna,
Humana,
Health
Care
Services
Corporation,
or
HCSC,
and
other
leading
Blue
Cross
and/or
Blue
Shield
plans
such
as
Highmark,
Horizon
Blue
Cross,
andBlue
Shield
of
California,
for
a
total
of
more
than
45
million
covered
Blues
plan
members.
Afirma
is
contracted
for
nearly
130
million
lives,
making
us
an
in-network
provider
for
payers
including
Medicare,
UnitedHealthcare,
Cigna,
Aetna
and
more
than
seven
million
Blues
plan
members,
which
facilitates
adoption.
OnMarch
1,
2015,
a
separate
CPT
code,
or
Current
Procedural
Terminology
code,
for
the
Afirma
GEC,
was
issued
which
we
believe
will
continue
to
facilitate
ourprogress
with
payer
coverage
and
contracts,
and
reimbursement.
The
new
code
became
effective
January
1,
2016.







We
estimate
that
our
market
penetration
has
doubled
in
the
last
two
years,
to
approximately
25%,
based
on
the
number
of
Afirma
GEC
tests
performedrelative
to
an
18%
rate
of
indeterminate
results
among
the
estimated
525,000
FNAs
performed
each
year
in
the
United
States.Our Pulmonology Solution







We
launched
our
first
pulmonology
product—for
improved
lung
cancer
diagnosis—in
April
2015.
The
Percepta
Bronchial
Genomic
Classifier
is
designed
tohelp
resolve
diagnostic
ambiguity
among
the
approximately
250,000
patients
each
year
who
undergo
bronchoscopy
to
determine
if
lung
nodules
or
lesions
arebenign
or
cancerous.
Our
solution
is
intended
to
identify
patients
with
inconclusive
bronchoscopy
results
whose
nodules
or
lesions,
initially
found
on
CT
scans,
areat
low
risk
of
being
cancerous,
so
these
patients
can
potentially
avoid
unnecessary
invasive,
risky
and
costly
diagnostic
procedures
and
be
monitored
with
low-dosecomputed
tomography,
or
LDCT,
instead.
Early
adoption
of
the
Percepta
classifier
in
April
2015
was
supported
by
the
subsequent
publication
in
July
2015
ofclinical
validation
data
in
The New England Journal of Medicine .
Our
initial
commercialization
focus
is
on
securing
adoption
among
leading
institutions
as
webuild
our
library
of
clinical
evidence,
including
additional
clinical
utility
data,
and
secure
Medicare
and
private-payer
reimbursement.
As
of
March
2016,
40thought-leading
academic
and
other
customers
across
the
country
are
offering
Percepta
to
their
patients,
and
we
are
on
track
to
secure
the
approximately
50
activesites
we
are
initially
targeting
by
mid-2016.







We
believe
our
introduction
of
Percepta
will
facilitate
the
subsequent
launch
in
the
fourth
quarter
of
2016
of
our
IPF
test,
which
will
target
the
samecustomers,
pulmonologists,
and
will
similarly
be
run
on7Table
of
Contentscytology
samples
obtained
through
bronchoscopy.
Our
IPF
test
is
intended
to
preoperatively
identify,
using
deep
RNA
sequencing,
patients
with
IPF
among
thosepresenting
with
a
suspected
ILD,
so
that
these
patients
can
obtain
an
accurate
diagnosis
and
proper
treatment
sooner—without
the
need
for
invasive
surgery.
Wehave
collaborated
with
more
than
25
clinical
sites
in
the
United
States
and
Europe
to
develop
our
IPF
test
and
to
prospectively
collect
patient
samples
for
use
in
itssubsequent
clinical
validation,
which
we
expect
to
complete
this
year.
We
plan
to
launch
the
test
in
the
fourth
quarter
of
2016
and
to
then
begin
assembling
theevidence
to
demonstrate
the
test's
clinical
utility.
In
addition
to
our
collaboration
with
clinical
thought
leaders,
we
partnered
with
the
Pulmonary
FibrosisFoundation
on
a
patient
survey
designed
to
quantify
and
qualify
the
extensive
challenges
that
ILD/IPF
patients
face
in
obtaining
a
timely,
accurate
diagnosis.Findings
from
the
survey
were
presented
at
the
PFF
2015
Summit:
From
Bench
to
Bedside
in
November
2015.The
Endocrinology
Market







Our
Afirma
solution
addresses
the
large
and
growing
thyroid
market,
which
is
burdened
with
significant
ambiguity
in
cytopathology
results,
offering
thepotential
to
reduce
the
rate
of
surgery
needed
to
diagnose
and
subsequently
treat
thyroid
cancers.







Thyroid
cancer
is
the
fastest
growing
cancer
in
the
United
States,
according
to
the
American
Cancer
Society,
and
evaluation
of
thyroid
nodules—the
mostcommon
indicator
of
thyroid
cancer—is
rapidly
increasing
the
number
of
thyroid
FNAs
conducted.
Approximately
525,000
thyroid
FNAs
were
performed
in
theUnited
States
in
2011,
which
is
more
than
double
the
number
of
FNAs
performed
in
2006.
We
estimate
our
addressable
thyroid
market
opportunity
today
isapproximately
$500
million
per
year
in
the
United
States,
consisting
of
an
estimated
$100
million
in
cytopathology
testing,
$350
million
in
Afirma
GEC
testsperformed
on
indeterminate
cytopathology
samples
and
an
additional
$40
million
related
to
our
Afirma
Malignancy
Classifiers.
Our
estimates
are
based
on
theproduct
of
FNA
volumes
and
the
estimated
reimbursement
per
test
for
both
cytology
and
the
Afirma
GEC,
not
our
list
price
at
which
we
bill.
We
believe
that
thereis
an
estimated
$300
million
additional
market
opportunity
for
the
Afirma
GEC
internationally.8Table
of
Contents







The
biology
of
thyroid
cells
is
complex.
Approximately
15%
to
30%
of
thyroid
nodule
FNAs
performed
in
the
United
States
are
deemed
indeterminatefollowing
cytopathology
review,
meaning
they
cannot
be
diagnosed
as
definitively
benign
or
malignant
by
cytopathology
alone.
Because
the
risk
of
malignancy
insuch
patients
ranges
from
20%
to
30%,
clinical
practice
guidelines
have
traditionally
recommended
that
most
of
these
patients
undergo
surgery
to
remove
all
orpart
of
the
thyroid
for
a
definitive
diagnosis.
Following
surgery,
however,
70%
to
80%
of
these
patients
prove
to
have
benign
nodules,
meaning
the
surgery
wasunnecessary.
We
estimate
each
surgery
costs
$15,000
to
over
$20,000
on
average.
Additionally,
such
surgeries
have
a
complication
rate
of
2%
to
10%,
and
mostpatients
subsequently
require
lifelong
thyroid
hormone
replacement
therapy.







We
estimate
that
approximately
3,500
endocrinologists
specialize
in
thyroid
disease
and
perform
FNAs.
We
also
serve
other
specialists,
including
radiologistsand
ear,
nose
and
throat,
or
ENT,
physicians
who
similarly
perform
FNAs.
Approximately
60%
of
FNAs
are
performed
in
ambulatory,
or
community-based,practices,
with
the
remaining
40%
conducted
in
institutional
settings,
comprised
of
both
academic
centers
and
integrated
delivery
networks,
which
are
networks
offacilities
and
providers
that
work
together
to
offer
a
continuum
of
care
to
a
specific
geographic
area
or
market.
While
endocrinologists
generally
diagnose
patientsand
refer
them
to
surgery
when
necessary,
endocrinologists
do
not
perform
the
surgeries
themselves.
Institutions,
which
influence
standard
of
care,
typically
havecytopathology
laboratories
on-site,
to
which
the
institutions'
endocrinologists
submit
patient
samples
for
review.
Additional
stakeholders
that
may
be
involved
inthe
decision-making
process
in
institutions
include
radiologists,
pathologists
and,
occasionally,
administration.
We
offer
Afirma
to
institutional
customers
as
anoption
following
their
internal
cytopathology
testing,
and
receive
orders
for
the
Afirma
GEC
only
and/or
the
Malignancy
Classifiers
from
these
customers.
Werefer
to
this
as
our
Afirma
Diagnostic
Partner
model.
We
similarly
offer
this
model
to
a
number
of
regional
laboratories,
which
perform
the
cytopathology
testingand
send
the
indeterminate
samples
to
us
for
Afirma
GEC
testing
only,
which
enables
us
to
further
penetrate
the
local-physician
market.
This
approach
represents
ahigher
margin
opportunity
versus
in
settings
where
we
also
conduct
the
lower
margin
cytopathology
assessment.Afirma
Thyroid
FNA
Analysis







Launched
in
2011,
the
Afirma
Thyroid
FNA
Analysis
is
our
comprehensive
offering
for
thyroid
nodule
assessment.
The
solution
centers
on
our
proprietaryAfirma
GEC
to
resolve
indeterminate
FNA
results,
based
on
cytopathology,
so
that
patients
whose
nodules
are
benign
can
avoid
unnecessary
diagnostic
surgeryand
undergo
routine
monitoring
instead.
The
Afirma
GEC
is
a
142-gene
signature
that
is
proven
in
multiple
peer-reviewed,
published
studies
to
identify
benignnodules
with
a
high
level
of
accuracy
among
those
deemed
indeterminate
by
cytopathology.
An
additional
25
genes
are
used
to
differentiate
uncommon
neoplasmsubtypes.
Data
suggest
the
Afirma
GEC
can
enable
unnecessary
surgeries
to
be
reduced
by
approximately
50%.
Our
comprehensive
solution
also
includes
ourAfirma
Malignancy
Classifiers—comprised
of
tests
for
medullary
thyroid
cancer,
a
rare
and
aggressive
form
of
thyroid
cancer,
and
BRAF
V600E
gene
mutationalstatus,
which
is
often
predictive
for
papillary
thyroid
cancer—which
were
launched
in
May
2014
to
preoperatively
help
inform
selection
of
surgery
when
surgery
isneeded,
minimizing
the
need
for
patients
to
undergo
an
additional
"completion
surgery."
The
MTC
test
result
is
included
as
part
of
the
patient
report
when
anAfirma
GEC
is
performed
on
any
FNA
that
is
indeterminate
by
cytopathology.
Physicians
can
also
order
it
separately
for
use
on
FNAs
that
are
malignant
bycytopathology.
The
BRAF
test
is
performed
when
ordered
specifically
by
the
physician
on
either
GEC
suspicious
or
malignant
by
cytopathology
FNAs.







The
Afirma
Thyroid
FNA
Analysis
includes
initial
cytopathology
to
optimize
utilization
of
the
Afirma
GEC,
ensuring
that
the
test
is
used
appropriately
andwithout
the
need
for
patients
to
return
for
a
repeat9Table
of
ContentsFNA
procedure.
We
offer
the
Afirma
GEC
through
two
models,
designed
to
meet
the
needs
of
both
our
community-practice
and
institutional
and
regionallaboratory
customers.Our Total Solution Model







This
model
allows
community-based
physicians
to
implement
Afirma
in
their
practice
without
any
meaningful
changes
to
their
workflow.
Samples
for
bothcytopathology
and
the
Afirma
GEC
are
collected
during
one
FNA
procedure
using
well-accepted
and
widely-used
techniques.
Customers
send
both
thecytopathology
and
the
Afirma
GEC
samples
overnight
to
our
CLIA-certified
laboratory
in
Austin,
Texas.
After
we
accession
the
samples
into
our
laboratoryinformation
system,
the
Afirma
GEC
samples
are
stored
in
a
freezer
while
the
cytopathology
samples
are
prepared
and
stained
for
review
by
ThyroidCytopathology
Partners,
or
TCP,
a
specialized
cytopathology
practice
in
Austin,
Texas
that
provides
professional
diagnoses
on
these
samples.
When
cytopathologyresults
are
indeterminate,
we
send
the
stored
sample
to
our
CLIA-certified
laboratory
in
South
San
Francisco,
California,
where
we
perform
the
Afirma
GECand/or
Malignancy
Classifiers.
Results
are
provided
to
the
ordering
physician
via
a
comprehensive
report
that
provides
cytopathology
results
and
identifies
theAfirma
GEC
results
as
either
"benign"
or
"suspicious"
for
malignancy
and
the
Afirma
Malignancy
Classifiers
as
"positive"
or
"negative."







Approximately
14%
to
17%
of
thyroid
FNA
biopsies
from
TCP
have
been
classified
as
indeterminate
and
have
been
reflexed
to
the
GEC.
This
rate
is
at
thelow
end
of
the
15%
to
30%
range
cited
in
the
200910Table
of
ContentsAmerican
Thyroid
Association
Guidelines,
suggesting
TCP's
specialized
focus
on
thyroid
cytopathology
offers
results
that
are
more
consistent
with
those
ofacademic
settings.
Through
our
relationship
with
TCP,
the
high
quality
of
care
historically
only
accessible
to
patients
in
academic
settings
is
now
broadlyavailable.
By
using
a
large,
high-volume,
thyroid-specialized
pathology
practice
to
offer
consistent
cytopathology
analysis,
we
can
optimize
quality
and
manageappropriate
utilization,
helping
to
ensure
that
the
Afirma
GEC
is
not
run
on
cytologically
benign
or
malignant
samples,
or
where
the
FNA
contains
insufficientcellular
material
for
diagnosis.
We
believe
this
ability
to
manage
utilization
is
attractive
to
payers
looking
to
capture
the
value
we
promise
in
patient
care.
In
thefourth
quarter
of
2015,
approximately
87%
of
the
FNAs
we
received
were
for
the
Afirma
total
solution
model.Afirma Diagnostic Partner Model







In
this
model,
academic
and
hospital-based
customers
as
well
as
integrated
delivery
networks
typically
perform
their
own
cytopathology
analysis
and
thenonly
send
us
samples
for
Afirma
GEC
testing
when
the
cytopathology
result
is
indeterminate.
We
also
receive
samples
to
perform
the
Afirma
MalignancyClassifiers
either
in
addition
to
the
GEC
or
for
patients
with
a
suspicious
for
malignancy
result
by
cytopathology.
In
this
scenario,
the
physician
collects
the
FNAsample
for
GEC
testing
at
the
same
time
the
FNA
sample
is
collected
for
cytopathology
review.
The
GEC
test
sample
is
preserved
until
the
cytopathology
resultsare
processed.
When
the
cytopathology
result
is
reported,
the
preserved
FNA
sample
is
sent
overnight
to
our
CLIA-certified
laboratory
for
testing,
using
theAfirma
GEC
when
the
result
is
indeterminate
and/or
using
the
Malignancy
Classifier
analysis
for
suspicious
samples.







Similarly,
we
offer
the
Afirma
Diagnostic
Partner
model
to
regional
laboratories
that
serve
community-based
physicians,
which
allows
us
to
further
penetratethis
market.
With
this
approach,
the
physician
collects
the
FNA
sample
for
Afirma
GEC
testing
at
the
same
time
the
FNA
sample
is
collected
for
cytopathologyreview.
The
physician
sends
both
samples
to
the
regional
laboratory,
which
preserves
the
Afirma
GEC
test
sample
until
the
cytopathology
results
are
processed.
Ifthe
cytopathology
results
are
indeterminate,
the
laboratory
sends
via
overnight
service
the
preserved
FNA
sample
for
Afirma
GEC
testing
in
our
CLIA
laboratory.Similarly,
samples
with
suspicious
cytopathology
results
are
sent
to
our
South
San
Francisco-CLIA
laboratory
for
Malignancy
Classifier
analysis.
In
the
fourthquarter
of
2015,
approximately
13%
of
the
FNAs
we
received
were
from
the
Afirma
Diagnostic
Partner.







Whether
the
final
result
is
rendered
by
cytopathology
alone
or
a
combination
of
cytopathology
and
genomic
testing,
physicians
receive
an
actionable
answerbased
on
samples
collected
in
a
single
patient
visit.Our
Afirma
Growth
Strategy







Our
business
growth
is
predominantly
driven
by
growth
of
the
Afirma
GEC.
Key
initiatives
include:•Continue to Drive Afirma as the Leading, Comprehensive Solution for Managing Patients with Thyroid Nodules. 

We
believe
that
Afirma
offers
aunique,
market-leading
solution
that
enables
patients
to
avoid
unnecessary
surgeries
and
provides
cost
savings.
Our
service
models
fit
the
needs
ofmultiple
specialties
that
perform
or
evaluate
FNAs,
in
a
variety
of
settings,
providing
a
comprehensive
assessment,
preoperatively,
on
a
single
FNAcollected
on
the
first
patient
visit.
We
are
advancing
this
value
proposition
by
reinforcing
our
market-leadership
position
and
through
patient-centered
marketing
messages
and
content.
•Expand and Deepen Our Penetration through our Diagnostic Partner Model. 

We
believe
that,
in
addition
to
community
endocrinologist
and
ENTcustomers,
radiology
practices,
hospital-based
laboratories,
integrated
delivery
networks,
and
regional
pathology
laboratories
present
an
opportunityto
conduct
more
Afirma
GEC
tests
at
the
local
level.
Community
physicians
often
refer
their
thyroid
nodule
patients
to
radiology
centers
orhospital-based
radiologists
for
FNA
procedures,
which
are
often
performed
using
ultrasound-guided
techniques.
Additionally,
regional11Table
of
Contentspathology
laboratories
often
perform
cytopathology
for
community
physicians.
We
believe
that
partnering
with
these
diverse
clients
provides
uswith
an
opportunity
to
further
grow
our
Afirma
GEC
business,
while
also
enabling
these
practices
to
enhance
their
offerings
to
their
referringphysician
customers.•Expanded our Sales Force. 

We
grew
our
internal
sales
force
in
2015,
enabling
us
to
further
drive
market
penetration
and
expansion
for
Afirma,
inboth
the
ambulatory
physician
practice
setting
as
well
as
in
institutional
accounts
and
integrated
delivery
networks.
We
expect
to
continue
growingthis
dedicated
sales
force
to
position
us
to
further
penetrate
the
market
and
to
transition
as
we
exit
our
co-promotion
agreement
with
Genzyme.
•Strengthen Marketing Programs. 

We
support
our
sales
efforts
with
comprehensive
marketing
initiatives
that
include
medical
education,
speakerprograms
for
physicians
to
share
their
experience
with
Afirma,
as
well
as
more
traditional
promotional
campaigns
targeting
endocrinologists
andother
physicians
and
patients
who
have
been
diagnosed
with
a
thyroid
nodule.
We
also
provide
marketing
materials
and
tools
for
referral
practices,enabling
them
to
promote
their
use
of
Afirma
to
their
physician
customers.
•Drive Payer Coverage and Contracts. 

Many
physicians
typically
require
a
test
to
have
broad
coverage
and
be
offered
by
a
service
provider
thathas
in-network
status
before
they
will
offer
it
to
their
patients.
We
will
continue
our
efforts
to
advance
payer
coverage
decisions
and
contracts
tofacilitate
rapid
adoption
of
Afirma
among
ordering
physicians.
With
Medicare
and
most
of
the
leading
commercial
payers
covering
Afirma,including
large
Blue
Cross
and
Blue
Shield
plans,
we
intend
to
focus
our
efforts
on
obtaining
coverage
from
remaining
"Blues"
plans.
Additionally,we
are
expanding
our
resources
to
negotiate
and
secure
in-network
contracts
which
we
believe
will
facilitate
adoption
as
well
as
provide
morepredictable
reimbursement
and
revenue.Development
of
the
Afirma
Gene
Expression
Classifier
and
Malignancy
Classifiers







We
used
a
whole-genome
approach
to
develop
the
Afirma
GEC,
identifying
gene
expression
patterns
that
we
believed
could
best
identify
a
benign
thyroidnodule
signature
in
thyroid
FNA
samples
diagnosed
as
indeterminate
by
cytopathology.
We
utilized
microarray
technology
to
perform
whole-genome
analyses
onhundreds
of
thyroid
samples,
producing
a
rich
database
of
more
than
one
billion
genomic
measurements
of
thyroid
biology.
We
initially
measured
mRNAexpression
in
over
247,000
transcripts
before
selecting
the
target
genes
to
be
measured.
We
acquired
large
numbers
of
FNA
samples
taken
at
endocrinologypractices
across
the
United
States
in
the
early
development
of
the
Afirma
GEC.
Because
thyroid
cancer
is
a
complex
disease
with
multiple,
sometimes
rare,subtypes,
this
approach
provided
the
diversity
of
clinical
samples
that
would
be
encountered
both
during
clinical
validation
and
in
commercial
practice.
Ourscientists
then
developed
machine-learning
algorithms
using
sophisticated
statistical
approaches
to
distill
the
large
amount
of
genomic
data
and
to
address
FNAsample
variability,
dilution
effects
and
RNA
quantity
and
quality
challenges.
The
development
of
the
Afirma
GEC
first
on
thyroid
surgical
tissue
and
then
onthyroid
FNA
samples
was
first
published
in
2010
in
the
Journal of Clinical Endocrinology and Metabolism. Using
our
extensive
thyroid-genomic
database
derivedfrom
the
whole-genome
discovery
work
that
led
to
the
GEC,
which
we
believe
to
be
the
largest
single
data
set
for
thyroid
conditions,
we
developed
the
AfirmaMalignancy
Classifiers
as
an
extension
to
the
GEC.







Additionally,
our
research
and
development
team
continues
to
evaluate
potential
opportunities
to
use
new
genomic
discoveries
and
technologies
to
furtherimprove
patient
care.
For
example,
data
presented
in
October
2015
at
the
International
Thyroid
Congress
and
Annual
Meeting
of
the
American
ThyroidAssociation
and
subsequently
published
in
BMC BioInformatics in
January
2016
contributed
to
the
scientific
understanding
of
the
role
that
gene
variant
and
fusiondata,
derived
from
deep
RNA
sequencing,
can
potentially
play
in
thyroid
cancer
diagnosis.12Table
of
ContentsPublished
Evidence
for
Afirma







We
believe
that
developing
an
extensive
library
of
rigorous
clinical
evidence
to
support
our
tests
is
critical
to
driving
inclusion
in
clinical
guidelines,
securingreimbursement
and
gaining
physician
adoption.
To
this
end,
nearly
20
scientific
studies
supporting
Afirma
have
been
published
in
peer-reviewed
journals.
Theseinclude
two
clinical
validation,
one
analytical
verification,
15
clinical
utility—including
two
long-term
durability—and
two
cost-effectiveness
studies.
Following
isan
overview
of
some
of
the
key
studies.Clinical ValidationPreoperative Diagnosis of Benign Thyroid Nodules with Indeterminate Cytology (Alexander, The New England Journal of Medicine, 2012)







In
this
study,
which
was
sponsored
by
us
and
conducted
with
the
support
of
institutional
research
grants
from
us,
our
Afirma
GEC
exhibited
a
negativepredictive
value,
or
NPV,
of
95%
for
indeterminate
results
in
the
atypia
or
follicular
lesion
of
undetermined
significance
category
(AUS/FLUS)
and
94%
forindeterminate
results
in
the
suspicious
for
follicular
or
Hürthle
cell
neoplasm
category
(SFN/SHN)
and
reclassified
as
benign
over
half
of
the
true
benign
FNAsamples
that
had
indeterminate
cytopathology
diagnoses,
which
the
authors
defined
to
include
any
results
suspicious
for
malignancy
in
addition
to
AUS/FLUS
andSFN/SHN.
This
pivotal
validation
study
employed
a
prospective,
multicenter,
double-blind
study
design
to
validate
the
accuracy
of
preoperative
Afirma
GECbenign
results
compared
to
post-operative
expert
pathology
review.
It
was
the
second
prospective
multicenter
study
validating
the
Afirma
GEC
approach.
Thestudy
supported
the
consideration
of
a
more
conservative
approach
than
surgery
for
most
patients
with
thyroid
nodules
that
are
cytologically
indeterminate
butbenign
according
to
Afirma
GEC
results.







This
large
multicenter
study
included
49
academic
and
community
practices
across
26
states
over
19
months.
The
study
involved
patients
withultrasonographically
confirmed
thyroid
nodules
one
centimeter
or
larger
in
diameter.
4,812
thyroid
FNA
samples
were
prospectively
collected
from
3,789
patients.In
the
independent
validation
set
of
265
nodules
that
were
indeterminate
by
cytopathology,
85
were
subsequently
determined
malignant
by
surgical
pathology,equivalent
to
a
32%
risk
of
malignancy.
The
Afirma
GEC
correctly
identified
78
of
the
85
malignant
nodules
as
suspicious,
a
92%
sensitivity
(95%
confidenceinterval,
or
CI,
84
to
97).
The
Afirma
GEC
achieved
a
52%
specificity
(95%
CI
44
to
59)
and
reclassified
as
benign
over
half
of
the
true
benign
FNA
samples
thathad
indeterminate
cytopathology
diagnoses.
The
authors
concluded
that
a
benign
Afirma
GEC
result
has
a
post-test
probability
of
malignancy
that
is
similar
to
theprobability
for
operated
nodules
with
cytologically
benign
features
on
an
FNA,
making
watchful
waiting
a
safe
and
effective
clinical
option
for
these
patients.Molecular Classification of Thyroid Nodules using High-Dimensionality Genomic Data (Chudova, Journal of Clinical Endocrinology and Metabolism,2010)







In
this
study,
which
we
sponsored,
our
FNA
trained
classifier
exhibited
an
NPV
of
96%
on
a
modest
sized
test
set
of
FNA
samples,
demonstrating
an
NPVsimilar
to
operated
nodules
with
benign
FNA
cytology.
In
this
study,
the
authors
defined
indeterminate
results
to
include
any
cytological
results
suspicious
formalignancy
in
addition
to
AUS/FLUS
and
SFN/SHN.
This
prospective,
multicenter,
double-blind
study
was
the
first
study
on
an
independent
modest-sized
set
ofFNA
samples
to
clinically
validate
the
gene
expression
classifier
approach.
In
addition,
this
study
demonstrated
that
even
with
substantial
degradation
of
RNA
andin
the
presence
of
blood,
in
some
cases
with
dilution
of
up
to
80%,
the
GEC
correctly
recognized
benign
nodules
and
did
not
miss
malignancy
in
the
majority
ofFNA
samples.







The
GEC
was
prospectively
validated
on
an
independent
test
set
of
48
FNA
samples,
one-half
of
which
had
indeterminate
cytopathology.
The
GEC
exhibitedan
NPV
of
96%
and
a
specificity
of
84%.
The
reference
gold
standard
in
this
outcome
study
was
the
post-operative
determination
of
whether
the
thyroid13Table
of
Contentsnodule
was
benign
or
malignant
by
expert
endocrine
surgical
pathologists
who
were
blinded
to
the
GEC
results.
The
authors
concluded
that
the
GEC
performanceand
validation
conducted
on
an
independent
validation
set
demonstrated
a
high
enough
specificity
to
reclassify
over
half
of
indeterminate
FNAs
as
benign
and
thatthe
observed
NPV
indicated
that
those
nodules
classified
as
benign
by
the
GEC
carry
a
similar
risk
of
malignancy
as
a
benign
diagnosis
by
thyroid
nodule
FNAcytopathology
alone.Clinical Utility/Long-term DurabilityThe Impact of Benign Gene Expression Classifier Test Results on the Endocrinologist-patient Decision to Operate in Patients with Thyroid Nodules withIndeterminate Fine Needle Aspiration Cytopathology (Duick, Thyroid, 2012)







This
study,
which
was
sponsored
by
us
and
supported
with
institutional
research
grants,
found
that
approximately
one
surgery
was
avoided
for
every
twoGECs
run
on
thyroid
FNAs
with
indeterminate
cytopathology,
which
the
authors
defined
to
include
any
results
suspicious
for
malignancy
in
addition
toAUS/FLUS
and
SFN/SHN.
This
study
evaluated
the
clinical
utility
of
the
Afirma
GEC
in
a
multicenter,
cross-sectional
survey
of
the
endocrinologists'
decision
tooperate
on
patients
with
a
cytopathology
indeterminate
FNA
and
a
benign
Afirma
GEC
result.
The
study
reviewed
the
first
2,040
GEC
tests
performed
on
samplesthat
were
classified
as
indeterminate
by
cytopathology,
of
which
the
Afirma
GEC
reclassified
52.3%
of
these
results
as
benign.
In
the
study,
a
cohort
of
51endocrinologists
(46
community
based;
five
academic
based)
at
21
practice
sites
in
11
states
completed
case
report
forms
on
whether
surgery
was
recommendedfor
their
Afirma
benign
patients.
Of
368
unique
patients
(395
cytopathology
indeterminate
FNAs)
for
whom
data
was
collected,
physicians
and
patients
opted
forwatchful
waiting
in
lieu
of
diagnostic
thyroid
surgery
92.4%
of
the
time
when
the
Afirma
GEC
result
reclassified
the
patient's
indeterminate
nodule
as
benign.Surgery
was
performed
on
only
7.6%
(95%
CI
5.1
to
10.8)
of
patients,
compared
to
the
74%
historic
rate
of
surgery
on
indeterminate
thyroid
nodules
previouslyreported
by
Thyroid in
2011,
a
90%
relative
reduction
in
the
decision
to
operate
(p
<
0.001).
Additionally,
this
7.6%
rate
of
surgery
is
similar
to
the
9.0%
rate
ofsurgery
associated
with
cytology
benign
FNA
results
and
reflects
other
factors
considered
by
physicians,
including
the
size
and
growth
rate
of
the
nodule,
thepresence
of
other
suspicious
or
malignant
nodules,
and
other
symptoms.
The
study
demonstrates
the
effect
of
the
GEC
on
clinical
decision
making
for
patients
withindeterminate
thyroid
nodules.Multicenter Clinical Experience with the Afirma Gene Expression Classifier (Alexander, Journal of Clinical Endocrinology and Metabolism, 2014)*







This
study
sought
to
determine
how
use
of
the
Afirma
GEC
affects
clinical
practice
in
a
real-world
environment.
Researchers
at
five
academic
centersfollowed
all
thyroid
nodule
patients
who
were
tested
with
the
Afirma
GEC
following
indeterminate
biopsy
results
based
on
cytopathology
between
2010
and
2013.Among
the
339
patients
with
indeterminate
thyroid
nodules,
the
Afirma
GEC
identified
174
(51%)
as
benign
and,
of
these,
71
patients
were
followed
clinically
foran
average
of
nine
months.
Of
these
71
patients,
only
one
cancer
was
identified
over
the
course
of
the
study,
confirming
a
high
NPV
for
the
Afirma
GEC
of
over95%,
which
is
similar
to
the
malignancy
risk
of
a
benign
cytopathology
result.
These
findings
reaffirm
data
from
the
initial
validation
trial
published
previously
inThe New England Journal of Medicine .
The
study
also
supports
previous
findings
regarding
the
clinical
utility
of
the
Afirma
GEC,
as
only
6%
of
patients
withnodules
identified
as
benign
by
our
test
underwent
surgery.


*A
co-author
of
this
study
was
a
consultant
and
member
of
our
clinical
advisory
board,
and
owned
shares
of
our
common
stock
at
the
time
of
the
study.14Table
of
ContentsAfirma Benign Thyroid Nodules Show Similar Growth to Cytologically Benign Nodules During Follow-Up (Angell, Journal of Clinical Endocrinology andMetabolism, 2015)







This
independent,
long-term
durability
study
found
that
thyroid
nodules
classified
as
benign
by
the
Afirma
GEC
had
similar
rates
of
growth
during
extendedfollow-up
as
nodules
that
were
benign
by
cytopathology,
which
suggests
comparable
clinical
behavior.
Researchers
at
Brigham
and
Women's
Hospital
evaluated90
patients
whose
thyroid
nodule
FNAs
were
deemed
benign
by
the
Afirma
GEC
(following
indeterminate
cytopathology)
between
2010
and
2014.
Usingultrasound
data
available
for
58
nodules
in
56
of
the
patients,
they
compared
rates
of
growth—an
indicator
of
potential
cancer—over
a
median
of
13
months
(rangeof
4
to
40
months)
to
those
of
1,224
thyroid
nodules
with
benign
cytopathology
results.
The
latter
were
from
873
patients
who
underwent
FNA
procedures
over
aten-year
period
prior
to
the
introduction
of
the
Afirma
GEC
and
who
were
followed
with
ultrasound
for
a
similar
period
of
time.
They
found
that
Afirma
GEC-benign
nodules
showed
similar
growth
as
the
cytopathology-benign
cases
using
either
of
two
criteria:
³
20%
in
two
dimensions
(8.6%
vs.
8.3%)
or
³
50%
involume
(17.2%
vs.
13.8%).
The
authors
noted
that
they
report
on
change
in
Afirma-benign
nodules
during
a
clinically
relevant
monitoring
period,
as
cytologicallybenign
thyroid
nodules
are
typically
followed
with
ultrasound
at
six
to
18
months.
They
concluded
that
the
findings
suggest
that
physicians
may
monitor
patientswith
benign
Afirma
GEC
results,
just
as
they
would
with
patients
whose
cytopathology
results
are
benign.Cost-effectivenessCost-effectiveness of a Novel Molecular Test for Cytologically Indeterminate Thyroid Nodules (Li, Journal of Clinical Endocrinology and Metabolism,2011) ©The Endocrine Society*







This
clinical
study
was
conducted
by
researchers
from
the
Johns
Hopkins
University
School
of
Medicine.
Supported
with
a
research
grant
from
us,
the
authorsfound
that
use
of
the
GEC
can
potentially
avoid
almost
three-fourths
of
currently
performed
surgeries
in
patients
with
benign
nodules
but
indeterminatecytopathology
results,
which
the
authors
defined
to
include
any
results
suspicious
for
malignancy
in
addition
to
AUS/FLUS
and
SFN/SHN.







Researchers
modeled
the
direct
cost
savings
of
utilizing
the
Afirma
GEC
in
clinical
practice.
They
developed
a
16-state
Markov
decision
model
based
uponthe
2009
American
Thyroid
Association
Guidelines
for
the
treatment
of
adult
patients
with
thyroid
nodules
with
an
FNA
cytopathology
indeterminate
diagnosis.The
decision
model
was
based
on
clinical
validation
study
results
and
expert
opinion
though
model
variables
necessarily
require
a
substantial
degree
of
judgment.One
million
patient
simulations
were
run
through
the
decision
model
to
represent
five
years
of
treatment
and
follow-up
for
patients
who
first
presented
withcytologically
indeterminate
thyroid
nodules.
Utilization
of
the
Afirma
GEC
yielded
an
estimated
direct
cost
savings
of
$1,453
and
an
increase
of
0.07
qualityadjusted
life
years,
or
QALYs,
per
patient,
a
modest
increase
in
the
quality
of
life.
A
Monte
Carlo
simulation
of
10,000
trials
testing
the
sensitivity
of
all
variablesacross
a
range
of
values
resulted
in
the
Afirma
GEC
being
both
less
costly
and
more
effective
in
improving
care
quality
92.5%
of
the
time.
A
Monte
Carlosimulation
is
the
repeated
sampling
of
random
outcomes
to
predict
likely
outcomes.
Additionally,
the
authors
found
no
difference
in
cancers
left
untreated
betweenthe
current
care
paradigm
of
sending
patients
with
indeterminate
nodules
to
surgery
versus
clinical
observation
following
a
benign
Afirma
GEC
result.
The
authorsconcluded
that
if
the
GEC
were
to
be
universally
adopted
in
routine
clinical
practice
in
the
United
States,
every
year
74%
fewer
surgeries
would
be
performed
onpatients
with
benign
nodules
that
cytopathology
would
have
classified
as
indeterminate.


*A
co-author
of
this
study
was
a
consultant
and
member
of
our
clinical
advisory
board,
and
owned
shares
of
our
common
stock
at
the
time
of
the
study.
Thisstudy
was
conducted
with
the
support
of
institutional
research
grants
by
us.15Table
of
Contents







The
cost
savings
estimate
in
the
Johns
Hopkins
model
was
based
on
an
estimated
14%
rate
of
surgery
on
a
benign
Afirma
GEC
nodule,
which
is
almostdouble
the
7.6%
and
6.3%
rates
subsequently
reported
in
studies
published
in
Thyroid (Duick,
2012)
and
the
Journal of Clinical Endocrinology and Metabolism(Alexander,
2014).
Based
on
the
rate
of
surgery
on
GEC
benign
nodules
reported
in
Thyroid ,
this
study
found
that
each
Afirma
GEC
test
would
saveapproximately
$2,600.Analytical ValidityAnalytical Performance Verification of a Molecular Diagnostic for Cytology-Indeterminate Thyroid Nodules (Walsh, Journal of Clinical Endocrinologyand Metabolism, 2012)







This
study
evaluated
the
Afirma
GEC's
ability
to
provide
a
robust,
accurate
and
reproducible
assay
result
on
patient
samples.
The
findings
showed
that
theRNA
content
in
an
FNA
sample
that
is
preserved
in
our
proprietary
FNAProtect
is
stable
for
up
to
six
days
at
room
temperature
with
no
changes
in
RNA
yield
orquality.
Additionally,
the
Afirma
GEC
results
were
found
to
be
stable
over
the
range
of
shipping
conditions
expected
in
clinical
practice.
Analytic
sensitivitystudies
demonstrated
tolerance
to
variation
in
RNA
input
(5-25ng)
and
to
the
dilution
of
malignant
FNA
material
down
to
20%.
Analytic
specificity
studies
usingmalignant
samples
mixed
with
blood
up
to
83%
and
genomic
DNA
up
to
30%
demonstrated
negligible
assay
interference
with
respect
to
false-negative
results,although
benign
FNA
samples
mixed
with
relatively
high
proportions
of
blood
demonstrated
a
potential
for
false-positive
results.
The
Afirma
GEC
results
wereshown
to
be
reproducible
across
operators,
runs,
reagent
lots,
and
in
inter-laboratory
comparisons
(standard
deviation
of
0.158
for
scores
on
a
>6
unit
scale),demonstrating
the
highest
level
of
evidence
for
analytic
validity
based
on
the
Evaluation
of
Genomic
Applications
in
Practice
and
Prevention,
or
EGAPP,
criteria.Analytical
sensitivity,
analytical
specificity,
robustness,
and
quality
control
of
the
Afirma
GEC
were
successfully
demonstrated.Afirma Malignancy ClassifiersMachine Learning from Concept to Clinic: Reliable Detection of BRAF V600E DNA Mutations in Thyroid Nodules Using High-Dimensional RNAExpression Data (Diggans, Pacific Symposium on Biocomputing, 2015)







This
study,
which
was
sponsored
by
us
and
supported
with
institutional
research
grants,
demonstrated
the
analytical
and
clinical
validity
of
the
Afirma
BRAFtest,
one
of
our
Afirma
Malignancy
Classifiers,
and
confirms
that
the
RNA-based
classifier
detects
the
BRAF
V600E
gene
mutation
with
high
diagnostic
accuracy.In
the
study,
researchers
evaluated
535
FNA
samples
using
both
the
Afirma
RNA-based
classifier
and
a
sensitive,
standard
PCR
DNA-based
test.
The
AfirmaBRAF
RNA-based
classifier
accurately
determined
the
presence
or
absence
of
the
BRAF
V600E
gene
mutation
with
equal
performance,
but
with
a
lower
non-diagnostic
rate,
than
the
DNA-based
test
(7.6%
vs.
24.5%).







Additionally,
strong
clinical
validation
data
demonstrating
the
ability
of
the
Afirma
MTC
test
to
accurately
identify
cases
of
medullary
thyroid
cancer,
whichwere
missed
by
cytopathology
alone,
were
presented
at
the
American
Association
of
Clinical
Endocrinologists,
or
AACE,
23
rd

Annual
Scientific
&
ClinicalCongress
in
May
2014.16Table
of
ContentsAfirma
in
Practice
Guidelines







We
believe
the
inclusion
of
diagnostic
tests
in
clinical
practice
guidelines
is
essential
to
drive
their
broad
adoption
and
reimbursement.
In
October
2015,
theAmerican
Thyroid
Association,
or
ATA,
updated
its
guidelines
for
managing
thyroid
nodules
and
included
the
recommendation
that
the
Afirma
GEC
may
be
usedin
lieu
of
diagnostic
surgery
to
rule
out
cancer
in
patients
whose
thyroid
nodules
are
indeterminate
following
traditional
cytopathology.
The
Afirma
GEC
is
theonly
molecular
test
with
a
high
enough
sensitivity
and
negative
predictive
value,
demonstrated
in
rigorous
clinical
trials,
to
be
recommended
as
an
option
for
suchuse.
Prior
to
this,
in
January
2013,
the
National
Comprehensive
Cancer
Network,
or
NCCN,
similarly
modified
its
thyroid
cancer
guidelines
to
recommend
thatphysicians
consider
molecular
testing
in
lieu
of
diagnostic
surgery
for
patients
with
cytopathology
indeterminate
thyroid
nodules,
provided
that
the
molecular
testpredicts
a
risk
of
malignancy
comparable
to
the
risk
of
malignancy
of
a
benign
cytopathology
result.
Based
on
published
evidence,
the
Afirma
GEC
meets
thesecriteria.
In
July
2014,
the
NCCN
further
modified
its
guidelines
to
include
the
Afirma
GEC
by
name.
Additionally,
UpToDate,
a
leading
evidence-based
clinicaldecision
support
resource
for
physicians,
recommended
the
Afirma
GEC
in
its
February
2013
review.
The
American
Association
of
Clinical
Endocrinologists
isexpected
to
issue
new
guidelines
for
thyroid
nodule
management
in
2016.Afirma
Marketing
and
SalesMarketing







We
employ
diverse
marketing
programs
to
inform
key
stakeholders
of
the
value
of
our
Afirma
solution
in
order
to
drive
adoption
and
reimbursement.
As
partof
our
marketing
strategy,
we
educate
physicians,
healthcare
professionals
and
managed
care
executives
about
our
unique
value
proposition,
which
is
supported
bynumerous
peer-reviewed
publications
demonstrating
the
analytical
and
clinical
validity,
clinical
utility
and
long-term
durability
of
a
benign
Afirma
GEC
result,
aswell
as
cost-effectiveness
of
Afirma.
We
primarily
achieve
this
through
national
and
regional
clinical
meetings
focused
on
thyroid
and
endocrine
disease
anddisorders.
We
also
sponsor
physician
speaker
programs
and
continuing
medical
education
where
both
academic
and
community
physicians
educate
their
peers
onthe
benefits
of
Afirma.
In
addition,
we
provide
marketing
materials
and
tools
to
physician
practices
and
regional
labs,
enabling
them
to
promote
to
their
referringphysicians
the
fact
that
they
offer
Afirma.







We
also
continue
to
employ
a
comprehensive
promotional
campaign
targeting
endocrinologists
and
other
physicians
who
perform
FNAs
and/or
managepatients
with
thyroid
nodules.
The
campaign
highlights
the
patient
benefits
of
Afirma—primarily
its
ability
to
help
avoid
unnecessary
surgeries
using
informationderived
from
a
single
FNA
procedure.
We
expanded
this
campaign
to
focus
on
a
patient
audience
while
still
highlighting
the
patient
experience
for
physicians.
Thecampaign's
centerpiece,
www.afirma.com,
serves
as
the
digital
home
for
an
inbound
marketing
campaign
for
patients
diagnosed
with
a
thyroid
nodule
that
includespaid
search,
search
engine
optimization,
advertising
in
physician
offices,
and
outreach
to
patient
advocacy
organizations.
To
support
the
consumer
campaign,
arobust
physician
campaign
includes
sales
aids,
medical
conference
promotion,
print
and
online
advertising
and
direct
mail
promotion.Sales







We
market
our
Afirma
solution
through
our
dedicated
specialty
sales
force
and
through
mid-September
2016
through
a
co-promotion
agreement
withGenzyme
Corporation,
which
targets
the
same
endocrinologist
customers
with
Thyrogen.
We
estimate
that
approximately
3,500
endocrinologists
specialize
inthyroid
disease
and
perform
FNAs
to
determine
whether
a
thyroid
nodule
is
malignant
for
cancer
or
benign.
We
also
serve
other
specialists,
including
radiologistsand
ENT
physicians,
who
also
perform
FNAs.
We
estimate
that
60%
of
FNAs
are
collected
in
the
physician
office
ambulatory
setting
and
40%
in
institutions
andintegrated
delivery
networks.
In
the
early
years
of
commercialization
of
Afirma,17Table
of
Contentsour
success
was
attributed
to
our
ability
to
gain
adoption
in
the
ambulatory
setting
where
the
physician
alone
can
make
a
decision
to
use
Afirma.
As
our
marketshare
and
brand
awareness
for
Afirma
have
grown,
we
now
offer
our
Afirma
Diagnostic
Partner
model
to
institutions,
which
involve
a
more
complex
sales
processdue
to
the
multiple
stakeholders
within
the
institutions
that
participate
in
the
decision
to
adopt
Afirma,
as
well
as
to
regional
laboratories
that
serve
communityphysicians.
We
believe
servicing
both
models
continues
to
be
important
to
our
future
growth.







We
continue
to
expand
our
team
of
sales
professionals,
which
as
of
December
31,
2015,
comprised
28
associates,
versus
eight
associates
two
years
ago.
Ourteam
focuses
on
driving
Afirma
adoption
and
GEC
test
volume
among
both
community-based
and
institutional
customers,
as
well
as
the
regional
laboratories,
withthe
continued
engagement
of
the
Genzyme
sales
force
through
mid-September
2016.
To
accommodate
the
transition
away
from
Genzyme,
we
plan
to
hireapproximately
ten
new
dedicated
sales
associates.
We
aim
to
have
the
expanded
sales
team
in
place
by
mid-September
2016
when
we
assume
full
sales
andmarketing
responsibility
for
Afirma.







We
entered
two
new
international
markets
in
2015.
In
July,
we
signed
an
exclusive
agreement
with
Pronto
Diagnostics
to
promote
the
Afirma
GEC
in
Israel,where
Pronto
distributes
several
leading
U.S.
diagnostics
brands.
In
April,
we
entered
into
an
exclusive
agreement
with
NewBridge
Pharmaceuticals,
whichdistributes
our
test
in
the
Middle
East
and
North
Africa.
Prior
to
that,
in
2014,
we
entered
Brazil,
our
first
international
market,
through
a
partnership
with
FleuryHealth
and
Medicine,
one
of
the
largest
diagnostics
organizations
in
Brazil.
All
of
these
actions
reflect
our
strategy
of
entering
international
markets
where
theadoption
opportunity
and
reimbursement
landscape
are
attractive
and
our
partners
have
a
strong
local
track
record
for
commercializing
novel
moleculardiagnostics.
We
do
not
expect
meaningful
revenue
from
international
sales
in
the
near
future.The
Pulmonology
Market:
Lung
Cancer
Diagnostic
Market







Pulmonology
represents
a
significant
opportunity
for
our
approach,
given
the
inherent
challenges
in
diagnosing
lung
cancer
and
lung
diseases,
which
aredifficult
to
access
without
invasive
procedures.







Lung
cancer
is
the
leading
cause
of
cancer
deaths
in
the
United
States,
where
more
than
220,000
new
diagnoses
and
nearly
160,000
deaths
were
expected
in2015.
Approximately
250,000
patients
with
suspected
lung
cancer
currently
undergo
bronchoscopy
each
year
in
the
United
States
to
assess
lung
nodules
or
lesionsthat
are
suspicious
for
lung
cancer.
Bronchoscopy,
a
procedure
typically
performed
in
an
outpatient
setting,
enables
the
physician
to
visualize
and
collect
cells
fromthe
patient's
lung
airways
and
is
considered
safer
than
other,
more
invasive
sampling
methods,
such
as
transthoracic
needle
biopsy,
or
TTNB,
or
surgical
lungbiopsy,
and
is
also
less
expensive.
TTNB,
for
example,
is
associated
with
a
15%
to
25%
risk
of
collapsed
lung;
estimated
costs
for
surgical
lung
biopsy
exceed$20,000.







Approximately
40%
of
bronchoscopies
produce
inconclusive
results,
meaning
that
malignancy
was
not
found—but
cannot
be
ruled
out—in
approximately100,000
patients
each
year
in
the
United
States.
This
results
from
difficulty
in
accessing
small
and/or
peripheral
nodules
with
bronchoscopy
devices.
This
leavesphysicians
with
the
dilemma
of
whether
to
direct
these
patients
to
surgery
or
other
invasive
procedures
to
obtain
a
diagnosis,
or
to
actively
monitor
the
patientswith
imaging
techniques,
with
the
potential
that
cancer
may
be
present.







An
estimated
1.6
million
pulmonary
nodules
are
discovered
incidentally
from
CT
scanning
as
a
part
of
routine
medical
care
in
the
United
States.Approximately
1.5
million
of
these
patients
do
not
have
cancer,
though
these
patients
are
recommended
to
be
followed
up
with
imaging
surveillance
or
biopsies.Beginning
in
early
2015,
more
than
eight
million
Americans
at
high-risk
for
lung
cancer
became
eligible
for
annual
screening
with
LDCT
through
new
coveragerequirements
for
private
insurers
as
part
of
the
Affordable
Care
Act,
and
through
Medicare.
This
screening
requirement
resulted
from
the
National
Lung
ScreeningTrial,
a
landmark
2011
government
study,
which
found
that
annual
screening
using
newer
LDCT
scans
reduced
lung
cancer
deaths
by
20%
among
older
currentand
former
smokers.
These
findings
had18Table
of
Contentssubsequently
prompted
the
U.S.
Preventive
Services
Task
Force
to
recommend
annual
LDCT
screening
for
people
at
high
risk
of
lung
cancer
due
to
their
age(from
55
to
80
years
old)
and
history
of
smoking
the
equivalent
of
a
pack
a
day
for
30
years.
While
annual
screening
is
expected
to
save
many
lives
through
earlydetection,
it
is
anticipated
to
also
find
many
lung
nodules
that
prove
to
be
benign,
which
has
raised
concerns
that
many
patients
will
be
unnecessarily
subjected
toinvasive,
risky
and
expensive
procedures
just
to
get
a
diagnosis.







We
believe
the
market
opportunity
for
our
Percepta
test
is
between
$350
million
and
$400
million
in
the
United
States,
based
on
the
current
number
ofbronchoscopies
performed
to
evaluate
lung
nodules
that
are
suspicious
for
cancer.
This
does
not
include
the
potential
for
the
number
of
bronchoscopies
to
increase,given
that
use
of
the
Percepta
classifier
could
make
bronchoscopy
a
more
attractive
option
for
nonsurgical
evaluation
of
lung
nodules
or
lesions.
Specifically,clinical
validation
data
for
the
Percepta
classifier
showed
that,
when
used
with
bronchoscopy,
the
combined
sensitivity
was
97%,
compared
to
75%
forbronchoscopy
alone.
Further,
the
number
of
patients
screened
for
lung
cancer—and
the
number
of
inconclusive
bronchoscopies—could
expand
significantly
asscreening
programs
are
implemented.Percepta
Bronchial
Genomic
Classifier







We
launched
the
Percepta
Bronchial
Genomic
Classifier
in
April
2015
to
improve
lung
cancer
diagnosis.
The
gene
expression
test
is
designed
to
identifypatients
with
lung
nodules
who
are
at
low
risk
of
cancer
following
an
inconclusive
bronchoscopy,
helping
to
determine
which
patients
may
be
monitored
with
CTsurveillance
and
avoid
unnecessary
invasive
procedures
or
surgery.







The
Percepta
test
comprises
a
23-gene
molecular
classifier
that
measures
the
"field
of
injury,"
detecting
molecular
changes
that
occur
in
the
epithelial
cellslining
the
lung's
respiratory
tract
in
response
to
smoking—the
cause
of
approximately
85%
to
90%
of
lung
cancers.
These
changes
can
be
detected
in
cytologicallynormal
airway
cells
and
have
been
shown
to
correlate
with
the
presence
of
malignancy
or
disease
processes
from
distant
sites
in
the
lung.
This
field
of
injurygenomic
technology
plays
a
key
role
in
our
positioning
of
Percepta
at
the
point
in
the
clinical
pathway
following
a
bronchoscopy
procedure
that
yields
inconclusiveresults.
By
resolving
ambiguity
following
a
bronchoscopy,
we
believe
our
test
results
can
potentially
help
physicians
and
patients
avoid
an
invasive
surgicalprocedure
as
the
next
step
in
achieving
diagnostic
results.
The
Percepta
test
is
also
designed
to
fit
easily
into
physicians'
existing
clinical
workflow.
During
anormal
bronchoscopy
procedure,
in
addition
to
collecting
the
standard
patient
samples,19Table
of
Contentsphysicians
use
tiny
brushes
to
collect
two
cytology
samples
from
the
mainstem
bronchus
for
potential
molecular
testing.
These
samples
are
then
placed
in
acollection
tube
and
sent
to
our
CLIA-certified
laboratory
in
South
San
Francisco
for
Percepta
testing
if
the
initial
bronchoscopy
is
inconclusive.
Percepta
testresults
are
typically
provided
to
physicians
within
ten
days
of
order.







We
estimate
that
approximately
4,000
physicians
perform
bronchoscopies
in
the
United
States,
of
which
approximately
80%
are
pulmonologists.
Theremaining
bronchoscopies
are
performed
by
thoracic
surgeons,
general
surgeons
and
other
subspecialty
physicians.
Most
bronchoscopies
are
performed
inhospitals
and
the
majority
of
those
for
lung
cancer
diagnosis
take
place
in
the
hospital
outpatient
setting.
The
primary
decision
maker
for
Percepta
is
thepulmonologist,
although
other
physicians
involved
in
the
diagnostic
work-up
for
lung
cancer
are
also
involved,
including
the
pathologist,
thoracic
surgeon,oncologist
and
radiologist.Development
of
Percepta
Bronchial
Genomic
Classifier







We
gained
Percepta
and
its
underlying
technology
and
intellectual
property
through
the
acquisition
of
Allegro
Diagnostics
Corp.
Early
work
published
inNature Medicine in
2007
demonstrated
how
gene
expression
alterations
in
cytologically
normal
large-airway
epithelial
cells
of
current
and
former
smokers
couldserve
as
a
lung
cancer
diagnostic.
Percepta
was
developed
using
a
training
set
of
299
patients,
a
subset
of
patients
enrolled
in
the
AEGIS,
or
Airway
EpitheliumGene
Expression
in
the
Diagnosis
of
Lung
Cancer,
trials,
designed
as
prospective,
observational,
cohort
studies
of
current
and
former
cigarette
smokers
with
lungnodules
suspicious
for
cancer,
who
were
undergoing
bronchoscopy
as
part
of
their
diagnostic
work-up.
Samples
were
collected
at
medical
centers
around
thecountry
using
standard
cytopathology
brushings
during
bronchoscopy.
The
microarray-based
gene
expression
algorithm
was
derived
using
genes
associated
withlung
cancer
and
with
three
clinical
covariates,
including
gender,
tobacco
use
and
smoking
history,
as
well
as
patient
age,
and
then
applying
logistical
regressionmodeling
techniques
to
lock
a
classifier
that
could
accurately
predict
cancer
status.Clinical
Evidence
for
PerceptaClinical Validation







The
performance
of
the
Percepta
test
has
been
demonstrated
in
studies
enrolling
over
1,000
patients
from
more
than
30
domestic
and
international
sites
inthree
clinical
validation
studies.
Results
from
two
large,
prospective,
multicenter
clinical
validation
studies
(AEGIS
I
and
II)
were
published
in
The New EnglandJournal of Medicine in
July
2015
and
demonstrated
the
ability
of
the
genomic
test
to
identify
patients
at
low
risk
of
lung
cancer,
which
could
support
a
moreconservative
diagnostic
approach.
The
studies
involved
639
patients
at
28
sites
in
the
United
States,
Canada
and
Ireland
who
were
undergoing
bronchoscopy
toevaluate
their
lung
nodules.
Among
patients
with
an
inconclusive
bronchoscopy
result,
the
Percepta
test
had
a
negative
predictive
value
of
91%,
demonstrating
itsability
to
identify
patients
at
low
risk
of
cancer
with
a
high
degree
of
accuracy.
The
Percepta
test
and
bronchoscopy
had
a
combined
sensitivity
of
97%,
comparedto
75%
for
bronchoscopy
alone.
Additionally,
clinical
validation
data
published
online
in
BMC Medical Genomics in
May
2015
also
found
the
test
to
have
an
NPVof
greater
than
90%
in
ruling
out
cancer
among
123
patients
with
inconclusive
bronchoscopy
results.Additional Evidence Development







In
February
2016,
initial
clinical
utility
study
data
for
the
Percepta
classifier
were
published
online
in
CHEST ,
the
official
journal
of
the
American
College
ofChest
Physicians.
Using
data
from
the
AEGIS
trials,
the
researchers
determined
the
number
of
patients
with
inconclusive
bronchoscopy
results
who
underwentinvasive
procedures
on
lung
nodules
and
lesions
that
turned
out
to
be
benign.
Based
on
the
Percepta
test
performance,
they
concluded
that
use
of
the
test
couldreduce
unnecessary
invasive
procedures
by
50%
among
patients
with
benign
disease
and
inconclusive
bronchoscopy
results.
This20Table
of
Contentspublication
follows
the
presentation
of
findings,
also
derived
from
the
AEGIS
trials,
which
were
presented
in
October
2015
at
the
CHEST
2015
Annual
Meeting.Additionally,
we
published
an
analytical
verification
study
in
February
2016
in
the
journal
BMC Cancer ,
establishing
the
quality
and
reproducibility
of
our
testingprocesses.
Additional
clinical
utility,
as
well
as
cost-effectiveness
data,
are
expected
to
be
presented
at
scientific
meetings
in
2016
and
are
intended
to
demonstratethe
test's
value
to
payers.Practice
Guidelines







Several
existing
guidelines
cover
the
management
of
patients
undergoing
a
diagnostic
workup
for
lung
cancer.
In
2013,
the
American
College
of
ChestPhysicians,
or
ACCP,
released
comprehensive
guidelines
for
the
diagnosis
and
management
of
lung
cancer,
updating
their
2007
guidelines.
NCCN
also
publishesguidelines
for
lung
cancer
screening
and
management
of
non-small
cell
lung
cancer
and
small
cell
lung
cancer.
Both
organizations'
recommendations
advise
onwhen
to
proceed
to
a
biopsy.
However,
there
is
little
guidance
on
what
to
do
after
an
inconclusive
bronchoscopy.
Our
internal
research
suggests
that
physiciansvary
widely
in
how
they
proceed
with
these
patients.
For
example,
some
physicians
take
all
of
these
patients
to
surgery,
or
TTNB,
while
others
are
moreconservative
and
place
them
under
CT
surveillance.
ACCP
guidelines
place
patients
with
an
inconclusive
bronchoscopy
at
an
intermediate
risk
of
malignancy,
thusimplying
that
pulmonologists
should
treat
these
patients
as
they
would
any
other
intermediate-risk
patient.
Current
guidelines,
however,
do
not
provide
definitiveguidance
on
what
to
do
for
this
group.
We
believe
that
Percepta
can
change
this
diagnostic
paradigm
by
offering
evidence-based
medicine
to
further
guide
how
tomanage
"intermediate-risk"
patients,
identifying
those
who
are
at
low
risk
for
lung
cancer
so
they
can
be
followed
with
CT
surveillance
rather
than
moving
on
toadditional
invasive
diagnostic
procedures.Percepta
Marketing
and
Sales







We
entered
the
market
with
a
small,
targeted
pulmonary
product
specialist
sales
force,
offering
the
Percepta
Bronchial
Genomic
Classifier
to
a
limited
numberof
thought-leading
academic
and
community-based
sites
as
we
complete
the
remaining
studies
we
believe
will
be
needed
to
build
out
our
library
of
evidence
tosupport
reimbursement.
As
of
March
2016,
40
institutions
are
offering
the
Percepta
test
to
their
patients
who
have
inconclusive
bronchoscopy
results,
and
weexpect
to
have
approximately
50
sites
using
Percepta
by
mid-2016.
We
intend
to
seek
reimbursement
from
Medicare
in
2016.
Upon
receiving
Medicarereimbursement,
we
expect
to
ramp
our
sales
and
marketing
efforts
as
we
seek
to
commercialize
the
test
more
broadly.
We
plan
for
this
to
include
increasing
oursales
force
and
expanding
our
marketing
efforts
through
such
activities
as
physician
speaker
programs,
increased
participation
in
regional
medical
conferences,
andpatient
education
resources
and
materials
to
which
physicians
can
refer
and/or
provide
patients.
Our
strategy
follows
a
similar
approach
as
used
to
commercializeAfirma.Our
Product
Pipeline







By
the
end
of
2016,
we
plan
to
have
three
commercialized
products
in
our
first
two
targeted
clinical
areas:
endocrinology
and
pulmonology.







In
addition,
we
are
continuously
evaluating
opportunities
to
expand
our
genomic
testing
approach
to
other
areas
of
substantial
unmet
clinical
need,
all
with
afocus
on
the
problem
of
diagnostic
ambiguity.
We
seek
large,
addressable
markets
where
we
can
leverage
our
molecular
cytology
platform
to
commercializecomprehensive
solutions
that
improve
quality
of
life
for
patients
by
reducing
unnecessary
surgeries
and
costs.
Today,
minimally
invasive
cytology
biopsies
orimaging
studies
are
routinely
collected
from
or
performed
on
numerous
organs
such
as
breast,
cervix,
endometrium
and
others.
Similar
to
thyroid
and
lung,
theseoften
generate
ambiguous
results
that
lead
to
invasive
procedures
including
surgery.
We
aim
to
continue
to
grow
our
business
through
internal
test
development
oracquisition.21Table
of
ContentsInterstitial Lung Diseases







The
market
for
an
ILD
diagnostic,
and
particularly
IPF,
represents
another
large
opportunity
to
resolve
preoperative
diagnostic
ambiguity,
helping
to
reducethe
need
for
invasive
procedures
and
associated
costs.
The
physician
specialist
for
our
IPF
product
is
also
the
pulmonologist,
enabling
us
to
leverage
ourpulmonology
channel,
which
we
have
already
entered
with
Percepta.







IPF
is
one
of
the
most
common
and
most
deadly
forms
of
ILD,
a
diagnostic
category
comprising
more
than
200
diverse
lung
disorders
characterized
byprogressive
scarring
of
the
lungs.
An
estimated
175,000
to
200,000
patients
in
the
United
States
and
major
European
countries
present
with
suspected
ILDs
eachyear.
IPF
and
other
ILDs
are
often
similar
in
symptoms
and
appearance,
making
them
challenging
for
physicians
to
distinguish
from
each
other.







This
uncertainty
can
result
in
incorrect
or
missed
diagnoses;
invasive,
risky
and
expensive
diagnostic
surgeries
costing
over
$40,000
per
surgery;
and/orsuboptimal
treatment.
A
recent
survey
of
ILD
patients
further
quantifies
the
significant
challenges
that
patients
face
in
obtaining
a
diagnosis.
The
survey,commissioned
by
the
Pulmonary
Fibrosis
Foundation,
with
support
from
Veracyte,
found
that
42%
of
respondents
endured
a
year
or
more
between
the
time
theyfirst
experienced
symptoms
and
the
time
they
obtained
a
diagnosis;
25%
endured
two
years
or
more.
Fifty-five
percent
(55%)
of
survey
respondents
weremisdiagnosed
at
least
once
and,
among
those
who
were
misdiagnosed,
the
misdiagnoses
persisted
for
nearly
a
year
(11
months).
Nearly
half
of
survey
participantsunderwent
a
surgical
lung
biopsy
as
part
of
their
diagnostic
process.
In
addition,
patients
diagnosed
with
IPF
who
actually
have
another,
less-serious
ILD
could
beerroneously
told
that
they
have
a
deadly
disease
with
a
very
poor
prognosis
and
may
be
subjected
to
inadequate
and/or
potentially
harmful
treatment.
The
need
forimproved
IPF
diagnosis
is
increasingly
important
with
the
recent
availability
of
new
therapies
for
IPF
in
the
United
States
and
Europe,
pirfenidone
and
nintedanib,that
slow
IPF
progression,
and
with
other
drugs
under
development
with
the
potential
to
slow
or
reverse
IPF-related
lung
damage.







IPF
diagnosis
is
typically
made
by
a
multidisciplinary
team,
or
MDT,
comprised
of
a
pulmonologist,
radiologist
and
pathologist,
based
on
a
thorough
clinicalwork-up
combined
with
the
presence
of
a
specific
pattern
called
usual
interstitial
pneumonia,
or
UIP,
from
high-resolution
computed
tomography,
or
HRCT,
orfrom
a
pathology
diagnosis
made
from
a
tissue
sample
collected
from
a
surgical
procedure.
These
UIP
patterns
are
often
difficult
to
distinguish,
and
evenexperienced
radiologists
and
pathologists
may
not
agree
on
the
diagnosis.
Additionally,
many
patients
live
in
areas
where
an
MDT
is
not
available.
When
an
IPFdiagnosis
is
uncertain
by
HRCT,
diagnostic
surgery
is
considered
the
best
approach;
however,
lung
surgery
is
invasive,
risky
and
expensive
and
many
patients
aretoo
sick
to
undergo
surgery.







A
genomic
test
that
could
resolve
diagnostic
ambiguity
found
in
patients
presenting
with
potential
IPF
or
another
ILD
could
enable
many
patients
to
bediagnosed
and
treated
appropriately,
sooner,
and
without
the
need
for
diagnostic
surgery.
Our
research
suggests
that
clinicians
see
the
need
for
a
genomic
test
thatcould
provide
greater
confidence
in
making
an
IPF
or
other
ILD
diagnosis.
Additionally,
in
data
presented
at
the
PFF
Summit
in
November
2015,
which
wesponsored,
pulmonologists
reported
that
the
availability
of
a
genomic
test
that
could
accurately
distinguish
UIP
patterns
would
reduce
their
use
of
surgical
lungbiopsy
by
more
than
half
in
ambiguous
cases,
based
on
imaging
and
clinical
history.
We
estimate
the
addressable
market
for
our
IPF
test
to
be
over
$500
million
inthe
United
States
and
Europe.Our IPF Test







We
are
developing
a
molecular
test
to
enable
less-invasive,
more
accurate
and
less
costly
diagnosis
of
IPF
using
cytology
samples
obtained
throughbronchoscopy.
Our
IPF
test
is
intended
to
replace
the
need
for
diagnostic
surgery
by
providing
valuable,
objective
information
that
will
enable
the
MDT
to
makemore
accurate
diagnoses
earlier.
We
plan
to
launch
our
test
in
the
fourth
quarter
of
2016.22Table
of
Contents







Our
molecular
classifier
is
designed
to
identify
patients
with
pathology
patterns
that
correspond
with
IPF
versus
those
typically
associated
with
other
ILDsand
is
being
developed
using
whole-genome,
deep
RNA
sequencing.
In
May
at
the
ATS
2015
International
Conference
and
in
November
at
the
PFF
Summit
2015:From
Bench
to
Bedside,
we
presented
data
demonstrating
the
potential
of
our
molecular
classifier
to
accurately
distinguish
IPF
from
other
ILDs
on
patient
samplesobtained
through
bronchoscopy.
Additionally,
in
May
2015,
The Lancet Respiratory Medicine published
results
from
key
original
proof-of-concept
researchinvolving
our
development
of
classifiers
that
could
distinguish
UIP
from
other
ILD
pathology
patterns
using
tissue
samples
obtained
through
surgery.







We
continue
to
work
with
more
than
25
clinical
sites
in
the
United
States
and
internationally
to
prospectively
collect
hundreds
of
patient
samples
for
use
indeveloping—and
later,
in
validating—our
test
under
our
BRAVE
protocols.
Our
intent
is
to
obtain
samples
that
represent
all
types
of
cases
and
associated
clinicalannotations,
which
we
believe
our
classifier
will
be
exposed
to
once
commercialized.
We
have
formed
a
"virtual"
MDT
of
world-renowned
experts
inpulmonology,
radiology
and
pathology
to
establish
"clinical
truth"
against
which
we
are
developing
and
measuring
our
test's
performance.
We
expect
to
presentclinical
validation
data
demonstrating
the
performance
of
our
IPF
test
on
bronchoscopy
samples
at
a
scientific
meeting
in
2016.Third-party
RelationshipsGenzyme







We
began
our
co-promotion
partnership
with
Genzyme,
a
subsidiary
of
Sanofi,
in
January
2012
by
executing
a
co-promotion
agreement.
Genzyme
is
anestablished
leader
in
endocrinology
globally,
developing
and
commercializing
Thyrogen
(thyrotropin
alfa
for
injection)
in
the
United
States
and
over
42
countriesworldwide.
Thyrogen
is
an
adjunctive
diagnostic
agent
used
in
follow
up
of
patients
with
well
differentiated
thyroid
cancer,
and
an
adjunctive
treatment
forablation
or
destruction
of
thyroid
remnants
in
patients
who
have
had
their
thyroid
removed
for
the
treatment
of
well-differentiated
thyroid
cancer.
We
manage
therelationship
through
a
steering
committee
that
oversees
certain
tactical
and
strategic
planning
activities.







Under
the
2012
agreement,
Genzyme
paid
us
a
$10.0
million
upfront
fee
and
we
are
required
to
pay
Genzyme
a
co-promotion
fee
that
was
equal
to
apercentage
of
our
U.S.
cash
receipts
from
the
sale
of
the
Afirma
GEC
test,
which
fee
varied
over
time.
We
record
the
Genzyme
co-promotion
fees,
net
ofamortization
related
to
the
upfront
fee,
within
selling
and
marketing
expense
in
our
statements
of
operations.







In
November
2014,
we
signed
an
Amended
and
Restated
U.S.
Co-Promotion
Agreement,
or
Amended
Agreement.
Under
the
Amended
Agreement,
the
co-promotion
fees
payable
to
Genzyme
as
a
percentage
of
U.S.
cash
receipts
from
the
sale
of
the
Afirma
GEC
test
were
reduced
from
32%
to
15%
beginningJanuary
1,
2015.
The
earliest
either
party
may
terminate
the
Amended
Agreement
for
convenience
is
July
1,
2016
and
our
Amended
Agreement
with
Genzymeexpires
in
January
2027.
On
March
9,
2016,
we
formalized
the
decision
to
conclude
the
Amended
Agreement
with
Genzyme
effective
September
9,
2016.







In
February
2015,
we
entered
into
an
Ex-U.S.
Co-Promotion
Agreement,
or
Ex-U.S.
Agreement,
with
Genzyme
for
the
co-exclusive
promotion
of
the
AfirmaGEC
test
in
two
countries
outside
the
United
States:
Brazil
and
Singapore.
We
also
granted
Genzyme,
for
a
limited
period
of
time,
an
exclusive
right
of
firstnegotiation
to
enter
into
an
agreement
with
us
for
the
promotion
of
the
Afirma
GEC
test
in
three
additional
countries:
Canada,
the
Netherlands
and
Italy.
Further,upon
mutual
agreement,
the
parties
may
add
additional
countries
(other
than
the
United
States)
to
the
Ex-U.S.
Agreement.
The
term
of
the
Ex-U.S.
Agreementcommenced
January
1,
2015
and
continues
until
December
31,
2019
with
extension
of
the
agreement
possible
upon
agreement
of
the
parties.
Country-specificterms
have
been
established
under
the
Ex-U.S.
Agreement
for
Brazil
and
Singapore.
Pursuant
to
these
terms,
we
will
pay
Genzyme
25%
of
cash
receipts
from
thesale
of
the
Afirma
GEC
test
in
Brazil
and
Singapore
over
a
five-year
period
commencing
January
1,
2015.
Beginning
in
the
fourth
year
of
the
agreement,
if
weterminate
the
agreement
for
convenience
with
respect
to
Brazil,
we
may
be
required
to
pay
a
termination
fee
contingent
on
the
number
of
GEC
billable
resultsgenerated.23Table
of
ContentsTCP







We
rely
on
Thyroid
Cytopathology
Partners,
P.A.
to
provide
cytopathology
professional
diagnoses
on
thyroid
FNA
samples
pursuant
to
a
pathology
servicesagreement.
We
originally
entered
into
the
pathology
services
agreement
in
November
2010
with
Brazos
Valley
Pathology,
P.A.
D/B/A
Reitpath,
which
assignedthe
contract
to
TCP
in
May
2011.
In
December
2012,
we
further
amended
the
pathology
services
agreement.
Pursuant
to
the
agreement,
as
amended
in
full,
TCPhas
the
exclusive
right
to
provide
the
cytopathology
diagnoses
on
FNA
samples
that
are
referred
to
us
as
part
of
the
Afirma
solution
at
a
fixed
price
per
test
withvolume
discounts.
TCP
can
terminate
the
agreement
upon
our
failure
to
pay
any
amounts
due
under
the
contract,
and
either
we
or
TCP
can
terminate
the
agreementupon
the
insolvency
of
the
other
party,
breach
of
the
agreement
by
the
other
party,
termination
or
breach
of
the
service
terms
or
the
suspension
or
termination
ofthe
necessary
regulatory
licenses
and
approvals
needed
to
perform
the
FNA
diagnoses.
TCP
is
co-located
in
a
portion
of
our
facilities
in
Austin,
Texas
andreimburses
us
for
a
portion
of
our
actual
out-of-pocket
rental
and
related
operating
expense
costs.
Our
agreement
with
TCP
was
effective
until
December
31,
2015and
thereafter
automatically
renews
every
year
unless
either
party
provides
notice
of
intent
not
to
renew
at
least
twelve
months
prior
to
the
end
of
the
then-currentterm.Reimbursement







Revenue
for
the
Afirma
Thyroid
FNA
Analysis
comes
from
several
sources,
including
commercial
third-party
payers,
such
as
insurance
companies
and
healthmaintenance
organizations,
government
payers,
such
as
Medicare
and
Medicaid,
and
patients.
We
believe
that
reimbursement
for
our
lung
products
will
be
derivedfrom
similar
sources
but
with
a
greater
proportion
coming
from
Medicare
and
potentially
Medicaid
due
to
the
age
of
the
target
patient
population.Payer Landscape







For
the
Afirma
GEC,
reimbursement
is
comprised
of
cytopathology,
the
Afirma
GEC
and/or
the
Malignancy
Classifiers
when
these
tests
are
performed
as
partof
our
comprehensive
solution.
To
date,
a
high
percentage
of
FNA
samples
received
are
accessioned
for
cytopathology,
for
which
we
bill
both
the
technical
andprofessional
component
using
established
CPT
codes.
Under
our
Afirma
Diagnostic
Partner
model,
which
is
used
predominantly
by
our
institutional
and
regionallaboratory
customers,
reimbursement
is
sought
for
the
Afirma
GEC
and/or
the
Malignancy
Classifiers.
We
bill
payers
directly
for
the
Afirma
GEC
and
theMalignancy
Classifiers
using
either
a
unique
code
or
a
miscellaneous
code.







Effective
January
2012,
Palmetto
GBA,
the
regional
Medicare
administrative
contractor,
or
MAC,
that
handled
claims
processing
for
Medicare
services
withjurisdiction
at
that
time,
issued
coverage
and
payment
determinations
for
the
Afirma
GEC.
Their
review
determined
that
the
Afirma
GEC
met
their
criteria
foranalytical
and
clinical
validity,
and
clinical
utility
as
a
reasonable
and
necessary
Medicare
benefit.
This
coverage
decision
provided
approximately
50
millionMedicare
participants
with
access
to
the
Afirma
GEC.
In
mid-September
2013,
Noridian
Administrative
Services
succeeded
Palmetto
as
the
MAC
for
our
regionand
continued
to
reimburse
under
our
unique
Z
code
originally
established
by
Palmetto.
On
a
five-year
rotational
basis,
Medicare
requests
bids
for
its
regionalMAC
services.
Any
future
changes
in
the
MAC
processing
or
coding
for
Medicare
claims
for
the
Afirma
GEC
or
for
future
products
could
result
in
a
change
in
thecoverage
or
reimbursement
rates
for
such
products,
or
the
loss
of
coverage.
On
March
1,
2015,
a
separate
CPT
code,
or
Current
Procedural
Terminology
code,
forthe
Afirma
GEC
was
issued,
which
we
believe
will
continue
to
facilitate
our
progress
with
payer
coverage
and
contracts,
and
reimbursement.
The
new
codebecame
effective
January
1,
2016.







Collectively,
as
of
March
2016,
we
have
nearly
180
million
lives
under
positive
medical
coverage
policies
for
the
Afirma
GEC
including
from
Medicare(January
2012)
and
leading
commercial
insurers,
including
UnitedHealthcare
(April
2013),
Aetna
(June
2013),
Humana
(July
2013),
Cigna
(December
2013)
andseveral
leading
Blue
Cross
and/or
Blue
Shield
plans,
including
Health
Care
Services24Table
of
ContentsCorporation
(December
2015)
and
Highmark,
Horizon
Blue
Cross,
and
Blue
Shield
of
California
(all
2014).
We
have
nearly
130
million
lives
under
contract
forthe
Afirma
GEC,
which
establishes
us
as
an
in-network
provider
and
helps
facilitate
adoption.
However,
payers
may
suspend
or
discontinue
reimbursement
at
anytime,
may
require
or
increase
co-payments
from
patients,
or
may
reduce
the
reimbursement
rates
paid
to
us.
Any
such
actions
could
have
a
negative
effect
on
ourrevenue.







We
plan
to
seek
Medicare
reimbursement
for
the
Percepta
Bronchial
Genomic
Classifier
from
the
Centers
for
Medicare
&
Medicaid
Services,
or
CMS,
in2016,
using
a
unique
Z
code,
which
we
believe
would
be
priced
by
our
local
CMS
contractor,
similar
to
our
early
approach
with
the
Afirma
GEC.Dependence on Certain Third-party Payers







We
rely
on
a
small
number
of
third-party
payers
for
a
significant
portion
of
our
revenue.
Reimbursement
on
behalf
of
patients
covered
by
Medicare
accountedfor
26%,
26%,
and
32%
of
our
revenue
for
the
years
ended
December
31,
2015,
2014,
and
2013,
respectively.
UnitedHealthcare
accounted
for
14%,
18%,
and
18%of
our
revenue
for
the
years
ended
December
31,
2015,
2014,
and
2013,
respectively.
Aetna
accounted
for
9%,
11%,
and
9%
of
our
revenue
for
the
years
endedDecember
31,
2015,
2014,
and
2013,
respectively.
The
loss
of
one
or
more
of
these
payers
would
have
a
negative
effect
on
our
business
and
our
revenue.Reimbursement Strategy







We
employ
a
multi-pronged
strategy
designed
to
achieve
broad
coverage
and
reimbursement
for
our
tests:•Meet the Evidence Standards Necessary to Be Consistent with Leading Clinical Guidelines. 

We
believe
inclusion
in
leading
clinical
practiceguidelines
plays
a
critical
role
in
payers'
coverage
decisions.
For
example,
the
data
published
on
the
Afirma
GEC
to
date
is
consistent
with
therecommendations
of
the
widely-recognized
American
Thyroid
Association
and
National
Comprehensive
Cancer
Network
clinical
practiceguidelines.
We
intend
to
pursue
a
similar
strategy
with
the
Percepta
test
and
our
future
tests.
•Execute an Internal Managed Care and Claims Adjudication Function as Part of Our Core Business Operations. 

We
believe
that
obtainingadequate
and
widespread
reimbursement
is
a
critical
factor
in
our
long-term
success.
We
employ
a
team
of
in-house
claims
processing
andreimbursement
specialists
who
work
with
payers,
physician
practices
and
patients
to
obtain
maximum
reimbursement.
In
parallel,
a
managed
careteam
collaborates
with
our
reimbursement
specialists
to
ensure
our
payer
outreach
strategy
reacts
to
and
anticipates
the
changing
needs
of
ourcustomer
base.
Our
customer
service
team
is
an
integral
part
of
our
reimbursement
strategy,
working
with
physician
practices
and
patients
tonavigate
the
claims
process.
•Cultivate a Network of Key Opinion Leaders. 

Key
opinion
leaders
are
able
to
influence
clinical
practice
by
publishing
research
and
determiningwhether
new
tests
should
be
integrated
into
practice
guidelines.
We
collaborate
with
key
opinion
leaders
early
in
the
development
process
to
ensureour
clinical
studies
are
designed
and
executed
in
a
way
that
clearly
demonstrates
the
benefits
of
our
tests
to
physicians
and
payers.
Ongoing
studiesto
support
real
world
experience
with
our
tests
are
a
key
component
of
our
efforts
to
collaborate
with
physician
influencers.
•Compile a Growing Library of Peer-reviewed Studies that Demonstrate the Test Is Effective. 

To
date,
several
peer-reviewed
articles
and
reviewpapers
have
been
published
and
have
helped
support
our
efforts
aimed
at
widespread
adoption
and
reimbursement
of
Afirma.
In
each
disease
areawe
pursue,
we
intend
to
conduct
studies
in
order
to
develop
similar
supporting
literature
as
we
are
currently
doing
with
the
Percepta
test.25Table
of
Contents•Established Payer Relationships and In-network Contracts. 

We
believe
that
positive
engagement
with
payers
for
Afirma,
which
has
led
tocoverage
decisions,
will
facilitate
our
efforts
as
we
approach
these
same
payers
for
coverage
of
Percepta
and
subsequent
tests.
Additionally,
webelieve
that
once
we
achieve
in-network
provider
status
with
payers
for
Afirma,
the
process
for
converting
Percepta
from
a
covered
test
to
an
in-network
offering
will
be
streamlined.Research
and
Development







Our
technology
platform
offers
a
number
of
key
attributes,
which
are
applicable
to
Afirma,
Percepta
and
products
we
may
develop
in
the
future:•Core Expertise in Broad-based Genomic Analysis. 

Our
team
of
bioinformatics
and
computational
scientists
possess
extensive
knowledge
of
bothexisting
computational
methods
as
well
as
the
capacity
to
develop
proprietary
methods
as
needed
for
algorithm
design.
We
demonstrated
our
abilityto
utilize
large
amounts
of
genomic
data
with
machine
learning
algorithms
in
the
development
of
the
GEC.
•Proprietary Capabilities in Analyzing Small, Heterogeneous Cytology Samples. 

We
have
developed
proprietary
technology,
intellectual
propertyand
know-how
for
optimized
methods
for
extraction
and
analysis
of
nanogram
quantities
of
RNA
from
small
biopsy
samples.
Although
others
canextract
RNA
from
these
small
biopsies,
we
believe
their
process
has
not
been
optimized
and
scaled
for
high-throughput
clinical
testing
and
large-scale
clinical
development
studies
involving
amplification
and
hybridization
to
high-density
microarrays.
Our
process
uses
commercially
availablereagents
and
instruments
with
our
own
proprietary
process
and
protocols,
which
results
in
RNA
extraction
from
the
range
of
FNAs
used
in
ourclinical
development
studies
and
our
commercial
laboratory
test.
•Precision and Reproducibility. 

We
have
in
place
standard
operating
procedures
governing
reagents,
materials,
instruments
and
controls
andextensive
experience
from
numerous
verification
studies
performed
for
both
the
Afirma
GEC
and
the
Percepta
test.
We
are
applying
the
same
high-quality
control
methods
that
were
developed
for
our
reagents
and
processes,
along
with
our
proprietary
software
for
automation,
sample
tracking,data
quality
control
and
statistical
analysis,
to
our
development
process
in
interstitial
lung
disease
and
expect
to
do
so
for
other
diseases
in
thefuture.
•Technology Agnostic Discovery Platform. 

We
are
not
reliant
on
specific
formats
and
are
able
to
take
advantage
of
a
multitude
of
genomictechnologies
in
developing
future
tests.
When
we
developed
the
Afirma
GEC
in
2008,
microarray
technologies
were
a
cost-effective
discoverytechnology
compared
to
other
approaches
that
were
nascent
at
the
time.
More
recently,
the
rapid
cost
reductions
achieved
in
next
generationsequencing
platforms
has
allowed
us
to
pursue
our
whole
genome
approach
to
biomarker
discovery
using
a
range
of
features
obtained
through
bothDNA
and
RNA
sequencing.Laboratory
Operations







Our
laboratory
operations
are
headquartered
at
our
CLIA-certified
laboratory
in
South
San
Francisco,
California,
where
we
perform
all
molecular
testing.
Forour
Afirma
solution,
customers
ship
samples
for
cytopathology
assessment
to
our
CLIA-registered
laboratory
in
Austin,
Texas.
Once
received,
samples
areprocessed
through
our
automated
accessioning
system,
prepared
for
cytopathology
review,
and
delivered
to
TCP
for
cytopathology
diagnosis.
If
cytopathologyresults
are
indeterminate,
the
sample
is
transferred
to
South
San
Francisco
where
we
perform
Afirma
GEC
testing.
Institutions
and
other
clients
using
our
AfirmaDiagnostic
Partner
model
ship
the
samples
for
the
Afirma
GEC
and/or
the
Afirma
Malignancy
Classifiers
directly
to
our
South
San
Francisco
laboratory.
Perceptasamples
are
also
shipped
directly
to
South
San
Francisco.
Our
South
San
Francisco
facility
is
responsible
for
quality
assurance26Table
of
Contentsoversight,
licensing
and
regulatory
compliance
and
maintenance
for
both
of
our
laboratories
to
ensure
data
integrity
and
consistent,
validated
processes.







We
have
recently
moved
into
expanded
state-of-the-art
laboratory
space
in
South
San
Francisco,
California
and
believe
we
have
sufficient
laboratory
capacityto
accommodate
volume
growth
for
our
Afirma,
Percepta
and
IPF
tests.Quality
Assurance







Our
quality
assurance
function
oversees
the
quality
of
our
laboratories
as
well
as
the
quality
systems
used
in
research
and
development,
client
services,
billingoperations
and
sales
and
marketing.
We
have
established
a
quality
system
implementation
and
maintenance,
document
control,
supplier
qualification,
corrective
orpreventive
actions
oversight,
and
employee
training
processes
that
we
believe
achieves
excellence
in
operations
across
the
entire
business.
We
continuouslymonitor
and
improve
our
quality
over
time
and
believe
our
implementation
of
these
processes
has
supported
our
achievement
of
product
performance,
customersatisfaction
and
retention
and
a
philosophy
of
continuous
improvement.Competition







We
believe
the
principal
competitive
factors
in
the
markets
we
target
with
our
products
include:•the
ability
of
the
test
to
answer
the
appropriate
clinical
question
at
the
right
point
in
the
clinical
pathway;
•quality
and
strength
of
clinical
validation
and
utility
data;
•confidence
in
diagnostic
results
backed
by
analytical
verification
data;
•the
extent
of
reimbursement
and
in-network
payer
contracts;
•inclusion
in
practice
guidelines;
•cost-effectiveness;
and
•ease
of
use.







We
believe
we
compete
favorably
on
the
factors
described
above
with
our
Afirma
solution
and
are
positioning
ourselves
to
compete
effectively
on
thesefactors
with
our
Percepta
Bronchial
Genomic
Classifier.







Our
principal
competition
for
Afirma
comes
from
traditional
methods
used
by
physicians
to
diagnose
thyroid
cancer.
Physicians
in
the
United
States
havehistorically
recommended
that
patients
with
indeterminate
diagnoses
from
cytopathology
results
be
considered
for
surgery
to
remove
all
or
part
of
the
thyroid
torule
out
cancer.
This
practice
has
been
the
standard
of
care
in
the
United
States,
as
well
as
in
many
international
markets,
for
many
years,
and
we
are
educatingphysicians
about
the
benefits
of
our
test
in
order
to
change
clinical
practice.







We
also
face
competition
from
companies
and
academic
institutions
that
use
next
generation
sequencing
technology
or
other
methods
to
measure
mutationalmarkers
such
as
BRAF
and
KRAS,
along
with
numerous
other
mutations.
The
organizations
include
Interpace
Diagnostics
Group,
Inc.,
Rosetta
Genomics
Ltd.,Integrated
Diagnostics,
Inc.
and
others
who
are
developing
new
products
or
technologies
that
may
compete
with
our
tests.
In
the
future,
we
may
also
facecompetition
from
companies
developing
new
products
or
technologies
that
are
able
to
compete
with
Afirma's
high
negative
predictive
value
to
rule
out
cancer.







With
the
Percepta
test,
we
believe
our
primary
competition
will
similarly
come
from
traditional
methods
used
by
physicians
to
diagnose
lung
cancer.
We
alsoanticipate
facing
potential
competition
from
companies
offering
or
developing
approaches
for
assessing
malignancy
risk
in
patients
with
lung
nodules27Table
of
Contentsusing
alternative
samples,
such
as
blood,
urine
or
sputum.
However,
such
"liquid
biopsies"
are
often
used
earlier
in
the
diagnostic
paradigm—for
instance,
toscreen
for
cancer—or
to
gauge
risk
of
recurrence
or
response
to
treatment.







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







Competitors
may
develop
their
own
versions
of
our
solution
in
countries
where
we
do
not
have
patents
or
where
our
intellectual
property
rights
are
notrecognized
and
compete
with
us
in
those
countries,
including
encouraging
the
use
of
their
solution
by
physicians
in
other
countries.







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







In
order
to
remain
competitive,
we
must
develop
and
maintain
protection
of
the
proprietary
aspects
of
our
technologies.
To
that
end,
we
rely
on
a
combinationof
patents,
copyrights
and
trademarks,
as
well
as
contracts,
such
as
confidentiality,
invention
assignment
and
licensing
agreements.
We
also
rely
upon
trade
secretlaws
to
protect
unpatented
know-how
and
continuing
technological
innovation.
In
addition,
we
have
what
we
consider
to
be
reasonable
security
measures
in
placeto
maintain
confidentiality.
Our
intellectual
property
strategy
is
intended
to
develop
and
maintain
our
competitive
position.







We
have
eight
issued
patents
which
expire
between
2029
and
2032
related
to
methods
used
in
the
Afirma
diagnostic
platform,
in
addition
to
eight
pendingU.S.
utility
patent
applications
and
six
U.S.
provisional
applications.
Some
of
these
U.S.
utility
patent
applications
have
pending
foreign
counterparts.
We
alsoexclusively
licensed
intellectual
property,
including
rights
to
two
issued
patents
that
will
expire
between
2030
and
2032,
and
three
pending
U.S.
utility
patentapplications
in
the
thyroid
space
that
would
expire
between
2030
and
2033
once
issued,
related
to
methods
that
are
used
in
the
Afirma
diagnostic
test,
some
ofwhich
have
foreign
counterparts.







In
the
lung
diagnostic
space,
we
exclusively
license
intellectual
property
rights
to
seven
pending
patent
applications
and
one
issued
patent
in
the
United
Statesand
abroad.
Patents
issuing
from
the
licensed
portfolio
will
expire
between
2024
and
2028.
In
addition,
we
own
a
PCT
application
and
a
pending
U.S.
applicationrelated
to
our
Percepta
test.
We
also
own
two
applications
related
to
other
lung
diseases,
and
a
PCT
application,
a
pending
U.S.
application,
and
two
ex-U.S.applications
related
to
our
interstitial
lung
disease
test
under
development.
Any
patents
granted
from
the
current
lung
cancer
patent
applications
will
expire
noearlier
than
2035
and
those
from
the
interstitial
lung
disease
patent
applications
will
expire
no
earlier
than
from
2034
to
2035.







We
intend
to
file
additional
patent
applications
in
the
United
States
and
abroad
to
strengthen
our
intellectual
property
rights;
however,
our
patent
applications(including
the
patent
applications
listed28Table
of
Contentsabove)
may
not
result
in
issued
patents
in
a
timely
fashion
or
at
all,
and
we
cannot
assure
investors
that
any
patents
that
have
issued
or
might
issue
will
protect
ourtechnology.
We
may
receive
notices
of
claims
of
potential
infringement
from
third
parties
in
the
future.







We
hold
registered
trademarks
in
the
United
States
for
"Veracyte,"
"Afirma,"
and
"Percepta"
and
for
the
Veracyte
and
Afirma
logos.
We
also
hold
registeredtrademarks
in
various
jurisdictions
outside
of
the
United
States.







We
require
all
employees
and
technical
consultants
working
for
us
to
execute
confidentiality
agreements,
which
provide
that
all
confidential
informationreceived
by
them
during
the
course
of
the
employment,
consulting
or
business
relationship
be
kept
confidential,
except
in
specified
circumstances.
Our
agreementswith
our
research
employees
provide
that
all
inventions,
discoveries
and
other
types
of
intellectual
property,
whether
or
not
patentable
or
copyrightable,
conceivedby
the
individual
while
he
or
she
is
employed
by
us
are
assigned
to
us.
We
cannot
provide
any
assurance,
however,
that
employees
and
consultants
will
abide
bythe
confidentiality
or
assignment
terms
of
these
agreements.
Despite
measures
taken
to
protect
our
intellectual
property,
unauthorized
parties
might
copy
aspects
ofour
technology
or
obtain
and
use
information
that
we
regard
as
proprietary.RegulationClinical Laboratory Improvement Amendments of 1988, or CLIA







As
a
clinical
reference
laboratory,
we
are
required
to
hold
certain
federal,
state
and
local
licenses,
certifications
and
permits
to
conduct
our
business.
UnderCLIA,
we
are
required
to
hold
a
certificate
applicable
to
the
type
of
laboratory
examinations
we
perform
and
to
comply
with
standards
covering
personnel,facilities
administration,
quality
systems
and
proficiency
testing.







We
have
current
certificates
under
CLIA
to
perform
testing
at
each
of
our
locations.
To
renew
our
CLIA
certificates,
we
are
subject
to
survey
and
inspectionevery
two
years
to
assess
compliance
with
program
standards.
The
regulatory
and
compliance
standards
applicable
to
the
testing
we
perform
may
change
overtime,
and
any
such
changes
could
have
a
material
effect
on
our
business.







If
one
of
our
clinical
reference
laboratories
is
out
of
compliance
with
CLIA
requirements,
we
may
be
subject
to
sanctions
such
as
suspension,
limitation
orrevocation
of
our
CLIA
certificate,
as
well
as
directed
plan
of
correction,
state
on-site
monitoring,
civil
money
penalties,
civil
injunctive
suit
or
criminal
penalties.We
must
maintain
CLIA
compliance
and
certification
to
be
eligible
to
bill
for
diagnostic
services
provided
to
Medicare
beneficiaries.
If
we
were
to
be
found
out
ofcompliance
with
CLIA
requirements
and
subjected
to
sanction,
our
business
could
be
harmed.U.S. Food and Drug Administration: Diagnostic Kits







Diagnostic
kits,
including
collection
systems,
which
are
sold
and
distributed
through
interstate
commerce
are
regulated
as
medical
devices
by
the
FDA.Devices
subject
to
FDA
regulation
must
undergo
premarket
review
prior
to
commercialization
unless
the
device
is
of
a
type
exempted
from
such
review.
Inaddition,
manufacturers
of
medical
devices
must
comply
with
various
regulatory
requirements
under
the
Federal
Food,
Drug,
and
Cosmetic
Act,
or
FDC
Act,
andimplementing
regulations
promulgated
under
that
Act.
Entities
that
fail
to
comply
with
FDA
requirements
may
be
subject
to
issuance
of
notice
of
observations,untitled
or
warning
letters,
and
can
be
liable
for
criminal
or
civil
penalties,
such
as
recalls,
import
detentions,
seizures,
or
injunctions,
including
orders
to
ceasemanufacturing.







The
FDC
Act
classifies
medical
devices
into
one
of
three
categories
based
on
the
risks
associated
with
the
device
and
the
level
of
control
necessary
to
providereasonable
assurance
of
safety
and
effectiveness.
Class
I
devices
are
deemed
to
be
low
risk
and
are
subject
to
the
fewest
regulatory
controls.
Many
Class
I
devicesare
exempt
from
FDA
premarket
review
requirements.
For
Class
II
devices,
the
FDA
generally
requires
clearance
through
the
premarket
notification,
or
510(k)clearance
process.
Class
III
devices
are29Table
of
Contentsgenerally
the
highest
risk
devices
and
are
subject
to
the
highest
level
of
regulatory
control
to
provide
reasonable
assurance
of
the
device's
safety
and
effectiveness.Class
III
devices
must
typically
be
approved
by
the
FDA
before
they
are
marketed.







Generally,
establishments
that
manufacture
or
distribute
devices,
including
manufacturers,
repackagers
and
relabelers,
specification
developers,
and
initialimporters,
are
required
to
register
their
establishments
with
the
FDA
and
provide
the
FDA
a
list
of
the
devices
that
they
handle
at
their
facilities.







After
a
device
is
placed
on
the
market,
numerous
regulatory
requirements
apply.
These
include:
all
of
the
relevant
elements
of
the
Quality
System
Regulation,or
QSR,
labeling
regulations,
restrictions
on
promotion
and
advertising,
the
Medical
Device
Reporting
regulation
(which
requires
that
manufacturers
report
to
theFDA
if
their
device
may
have
caused
or
contributed
to
a
death
or
serious
injury
or
malfunctioned
in
a
way
that
would
likely
cause
or
contribute
to
a
death
orserious
injury
if
it
were
to
recur),
and
the
Reports
of
Corrections
and
Removals
regulation
(which
requires
manufacturers
to
report
certain
recalls
and
field
actionsto
the
FDA).







The
FDA
has
issued
a
regulation
outlining
specific
requirements
for
"specimen
transport
and
storage
containers."
"Specimen
transport
and
storage
containers"are
medical
devices
"intended
to
contain
biological
specimens,
body
waste,
or
body
exudate
during
storage
and
transport"
so
that
the
specimen
can
be
usedeffectively
for
diagnostic
examination.
A
specimen
transport
and
storage
container
is
a
Class
I
device.
It
is
subject
to
MDR
requirements,
the
reporting
ofcorrections
and
removals,
registration
and
listing.
It
is
exempt
from
premarket
review
and
from
QSR
requirements,
except
for
recordkeeping
and
complainthandling
requirements,
so
long
as
no
sterility
claims
are
made.
Our
facility
is
registered
with
the
FDA
as
a
specification
developer,
which
means
that
we
can
sellthe
collection
system
under
our
own
name
and
outline
the
specifications
used
to
make
the
collection
system,
but
a
third
party
assembles
the
collection
system
forus.
The
containers
we
provide
for
collection
and
transport
of
Afirma
GEC
and
Percepta
samples
from
a
physician
to
our
clinical
reference
laboratory
are
listed
asClass
I
devices
with
the
FDA.
We
also
plan
to
list
our
sample
collection
containers
for
use
with
IPF
with
the
FDA
as
Class
I
devices.
If
the
FDA
were
to
determinethat
our
sample
collection
containers
are
not
Class
I
devices,
we
would
be
required
to
file
510(k)
applications
and
obtain
FDA
clearance
to
use
the
containers,which
could
be
time
consuming
and
expensive.







The
FDA
enforces
the
requirements
described
above
by
various
means,
including
inspection
and
market
surveillance.
If
the
FDA
finds
a
violation,
it
caninstitute
a
wide
variety
of
enforcement
actions,
ranging
from
an
Untitled
Letter
or
Warning
Letter
to
more
severe
sanctions
such
as:•fines,
injunctions,
and
civil
penalties;
•recall
or
seizure
of
products;
•operating
restrictions,
partial
suspension
or
total
shutdown
of
production;
and
•criminal
prosecution.Federal Oversight of Laboratory Developed Tests and Research Use Only Products







Clinical
laboratory
tests
like
the
Afirma
GEC
are
regulated
under
CLIA,
as
administered
by
CMS,
as
well
as
by
applicable
state
laws.
Clinical
laboratory
teststhat
are
developed
and
validated
by
a
laboratory
for
its
own
use,
which
are
referred
to
as
laboratory
developed
tests,
or
LDTs,
currently
are
generally
not
subject
toFDA
regulation,
although
reagents,
instruments,
software
or
components
provided
by
third
parties
and
used
to
perform
LDTs
may
be
subject
to
regulation.
Webelieve
that
the
Afirma
GEC
and
the
Percepta
test
are
LDTs.
FDA
currently
exercises
its
enforcement
discretion
for
LDTs.
In
October
2014,
the
FDA
publisheddraft
guidance
documents
describing
the
framework
by
which
they
might
regulate
LDTs.
The
framework
is
similar
to
the
guidance
they
issued
previously.
Thecomment
period
ended
in
February
2015.
There
is
no
timeframe
in
which
the
FDA
must
issue
final
guidance
documents.30Table
of
Contents







Some
of
the
materials
we
use
for
Afirma
and
Percepta
and
that
we
may
use
for
future
products
are
for
research
use
only,
or
RUO.
An
RUO
product
is
notintended
for
human
clinical
use
and
must
be
labeled
"For
Research
Use
Only.
Not
for
use
in
diagnostic
procedures."
RUOs
are
a
separate
regulatory
category
andare
not
considered
medical
devices.
They
are
therefore
not
subject
to
the
FDA
regulatory
requirements
discussed
above.
They
cannot
make
any
claims
related
tosafety,
effectiveness,
or
diagnostic
utility
or
be
intended
for
human
clinical
diagnostic
or
prognostic
use.
In
November
2013,
the
FDA
issued
guidance
regarding"Commercially
Distributed
In-Vitro
Diagnostic
Products
Labeled
for
Research
Use
Only
or
Investigational
Use
Only."







We
cannot
predict
the
ultimate
form
or
impact
of
any
such
RUO,
LDT
or
other
guidance
and
the
potential
effect
on
our
solutions
or
materials
used
to
performour
diagnostic
services.
While
we
qualify
all
materials
used
in
our
diagnostic
services
according
to
CLIA
regulations,
we
cannot
be
certain
that
the
FDA
might
notpromulgate
rules
or
issue
guidance
documents
that
could
affect
our
ability
to
purchase
materials
necessary
for
the
performance
of
our
diagnostic
services.
Shouldany
of
the
reagents
obtained
by
us
from
vendors
and
used
in
conducting
our
diagnostic
services
be
affected
by
future
regulatory
actions,
our
business
could
beadversely
affected
by
those
actions,
including
increasing
the
cost
of
service
or
delaying,
limiting
or
prohibiting
the
purchase
of
reagents
necessary
to
perform
theservice.







We
cannot
provide
any
assurance
that
FDA
regulation,
including
premarket
review,
will
not
be
required
in
the
future
for
our
diagnostic
services,
whetherthrough
additional
guidance
or
regulations
issued
by
the
FDA,
new
enforcement
policies
adopted
by
the
FDA
or
new
legislation
enacted
by
Congress.
Legislativeproposals
addressing
oversight
of
LDTs
were
introduced
in
recent
years,
and
we
expect
that
new
legislative
proposals
will
be
introduced
from
time
to
time.
It
ispossible
that
legislation
could
be
enacted
into
law
or
regulations
or
guidance
could
be
issued
by
the
FDA
which
may
result
in
new
or
increased
regulatoryrequirements
for
us
to
continue
to
offer
our
diagnostic
services
or
to
develop
and
introduce
new
services.







If
premarket
review,
including
approval,
is
required,
our
business
could
be
negatively
affected
until
such
review
is
completed
and
clearance
to
market
orapproval
is
obtained,
and
the
FDA
could
require
that
we
stop
selling
our
diagnostic
services
pending
premarket
clearance
or
approval.
If
our
diagnostic
services
areallowed
to
remain
on
the
market
but
there
is
uncertainty
about
the
legal
status
of
our
services,
if
we
are
required
by
the
FDA
to
label
them
investigational,
or
iflabeling
claims
the
FDA
allows
us
to
make
are
limited,
order
levels
may
decline
and
reimbursement
may
be
adversely
affected.
The
regulatory
process
mayinvolve,
among
other
things,
successfully
completing
additional
clinical
studies
and
submitting
a
premarket
notification
or
filing
a
PMA
application
with
the
FDA.If
premarket
review
is
required
by
the
FDA,
there
can
be
no
assurance
that
our
diagnostic
services
will
be
cleared
or
approved
on
a
timely
basis,
if
at
all,
nor
canthere
any
be
assurance
that
labeling
claims
will
be
consistent
with
our
current
claims
or
adequate
to
support
continued
adoption
of
and
reimbursement
for
oursolution.
Ongoing
compliance
with
FDA
regulations
would
increase
the
cost
of
conducting
our
business,
and
subject
us
to
heightened
requirements
of
the
FDA
andpenalties
for
failure
to
comply
with
these
requirements.
We
may
also
decide
voluntarily
to
pursue
FDA
premarket
review
of
our
diagnostic
services
if
wedetermine
that
doing
so
would
be
appropriate.Health Insurance Portability and Accountability Act







Under
the
federal
Health
Insurance
Portability
and
Accountability
Act
of
1996,
or
HIPAA,
the
Department
of
Health
and
Human
Services,
or
HHS,
has
issuedregulations
to
protect
the
privacy
and
security
of
protected
health
information
used
or
disclosed
by
health
care
providers,
such
as
us.
HIPAA
also
regulatesstandardization
of
data
content,
codes
and
formats
used
in
health
care
transactions
and
standardization
of
identifiers
for
health
plans
and
providers.
Penalties
forviolations
of
HIPAA
regulations
include
civil
and
criminal
penalties.31Table
of
Contents







We
have
developed
and
implemented
policies
and
procedures
designed
to
comply
with
these
regulations.
The
requirements
under
these
regulations
maychange
periodically
and
could
have
an
effect
on
our
business
operations
if
compliance
becomes
substantially
more
costly
than
under
current
requirements.







In
addition
to
federal
privacy
regulations,
there
are
a
number
of
state
laws
governing
confidentiality
of
health
information
that
are
applicable
to
our
business.The
U.S.
Department
of
Commerce,
the
European
Commission
and
the
Swiss
Federal
Data
Protection
and
Information
Commissioner
have
agreed
on
a
set
of
dataprotection
principles
and
frequently
asked
questions,
referred
to
as
the
Safe
Harbor
Principles,
to
enable
U.S.
companies
to
satisfy
the
requirement
under
EuropeanUnion
and
Swiss
law
that
adequate
protection
is
given
to
personal
information
transferred
from
the
European
Union
or
Switzerland
to
the
United
States.
TheEuropean
Commission
and
Switzerland
have
also
recognized
the
Safe
Harbor
Principles
as
providing
adequate
data
protection.







New
laws
governing
privacy
may
be
adopted
in
the
future
as
well.
We
have
taken
steps
to
comply
with
health
information
privacy
requirements
to
which
weare
aware
that
we
are
subject.
However,
we
can
provide
no
assurance
that
we
are
or
will
remain
in
compliance
with
diverse
privacy
requirements
in
all
of
thejurisdictions
in
which
we
do
business.
Failure
to
comply
with
privacy
requirements
could
result
in
civil
or
criminal
penalties,
which
could
have
a
materiallyadverse
effect
on
our
business.Federal and State Physician Self-referral Prohibitions







We
are
subject
to
the
federal
physician
self-referral
prohibitions,
commonly
known
as
the
Stark
Law,
and
to
similar
restrictions
under
California's
PhysicianOwnership
and
Referral
Act,
or
PORA.
Together
these
restrictions
generally
prohibit
us
from
billing
a
patient
or
any
governmental
or
private
payer
for
anydiagnostic
services
when
the
physician
ordering
the
service,
or
any
member
of
such
physician's
immediate
family,
has
an
investment
interest
in
or
compensationarrangement
with
us,
unless
the
arrangement
meets
an
exception
to
the
prohibition.







Both
the
Stark
Law
and
PORA
contain
an
exception
for
compensation
paid
to
a
physician
for
personal
services
rendered
by
the
physician.
We
havecompensation
arrangements
with
a
number
of
physicians
for
personal
services,
such
as
speaking
engagements
and
consulting
activities.
We
have
structured
thesearrangements
with
terms
intended
to
comply
with
the
requirements
of
the
personal
services
exception
to
Stark
and
PORA.







However,
we
cannot
be
certain
that
regulators
would
find
these
arrangements
to
be
in
compliance
with
Stark,
PORA
or
similar
state
laws.
We
would
berequired
to
refund
any
payments
we
receive
pursuant
to
a
referral
prohibited
by
these
laws
to
the
patient,
the
payer
or
the
Medicare
program,
as
applicable.







Sanctions
for
a
violation
of
the
Stark
Law
include
the
following:•denial
of
payment
for
the
services
provided
in
violation
of
the
prohibition;
•refunds
of
amounts
collected
by
an
entity
in
violation
of
the
Stark
Law;
•a
civil
penalty
of
up
to
$15,000
for
each
service
arising
out
of
the
prohibited
referral;
•possible
exclusion
from
federal
healthcare
programs,
including
Medicare
and
Medicaid;
and
•a
civil
penalty
of
up
to
$100,000
against
parties
that
enter
into
a
scheme
to
circumvent
the
Stark
Law's
prohibition.







These
prohibitions
apply
regardless
of
the
reasons
for
the
financial
relationship
and
the
referral.
No
finding
of
intent
to
violate
the
Stark
Law
is
required
for
aviolation.
In
addition,
knowing
violations
of
the
Stark
Law
may
also
serve
as
the
basis
for
liability
under
the
Federal
False
Claims
Act.32Table
of
Contents







Further,
a
violation
of
PORA
is
a
misdemeanor
and
could
result
in
civil
penalties
and
criminal
fines.
Finally,
other
states
have
self-referral
restrictions
withwhich
we
have
to
comply
that
differ
from
those
imposed
by
federal
and
California
law.
While
we
have
attempted
to
comply
with
the
Stark
Law,
PORA
and
similarlaws
of
other
states,
it
is
possible
that
some
of
our
financial
arrangements
with
physicians
could
be
subject
to
regulatory
scrutiny
at
some
point
in
the
future,
andwe
cannot
provide
assurance
that
we
will
be
found
to
be
in
compliance
with
these
laws
following
any
such
regulatory
review.Federal and State Anti-kickback Laws







The
Federal
health
care
program
Anti-kickback
Law
makes
it
a
felony
for
a
person
or
entity,
including
a
laboratory,
to
knowingly
and
willfully
offer,
pay,solicit
or
receive
remuneration,
directly
or
indirectly,
in
order
to
induce
business
that
is
reimbursable
under
any
federal
health
care
program.
A
violation
of
theAnti-kickback
Law
may
result
in
imprisonment
for
up
to
five
years
and
fines
of
up
to
$250,000
in
the
case
of
individuals
and
$500,000
in
the
case
of
organizations.Convictions
under
the
Anti-kickback
Law
result
in
mandatory
exclusion
from
federal
health
care
programs
for
a
minimum
of
five
years.
In
addition,
HHS
has
theauthority
to
impose
civil
assessments
and
fines
and
to
exclude
health
care
providers
and
others
engaged
in
prohibited
activities
from
Medicare,
Medicaid
and
otherfederal
health
care
programs.
Actions
which
violate
the
Anti-kickback
Law
also
incur
liability
under
the
Federal
False
Claims
Act,
which
prohibits
knowinglypresenting,
or
causing
to
be
presented,
a
false
or
fraudulent
claim
for
payment
to
the
U.S.
Government.







Although
the
Anti-kickback
Law
applies
only
to
federal
health
care
programs,
a
number
of
states,
including
California,
have
passed
statutes
substantiallysimilar
to
the
Anti-kickback
Law
pursuant
to
which
similar
types
of
prohibitions
are
made
applicable
to
all
other
health
plans
and
third-
party
payers.
BothCalifornia's
fee-splitting
statute,
Business
and
Professions
Code
Section
650,
and
its
Medi-Cal
anti-kickback
statute,
Welfare
and
Institutions
CodeSection
14107.2,
have
been
interpreted
by
the
California
Attorney
General
and
California
courts
in
substantially
the
same
way
as
HHS
and
the
courts
haveinterpreted
the
Anti-kickback
Law.
A
violation
of
Section
650
is
punishable
by
imprisonment
and
fines
of
up
to
$50,000.
A
violation
of
Section
14107.2
ispunishable
by
imprisonment
and
fines
of
up
to
$10,000.







Federal
and
state
law
enforcement
authorities
scrutinize
arrangements
between
health
care
providers
and
potential
referral
sources
to
ensure
that
thearrangements
are
not
designed
as
a
mechanism
to
induce
patient
care
referrals
or
induce
the
purchase
or
prescribing
of
particular
products
or
services.
The
lawenforcement
authorities,
the
courts
and
Congress
have
also
demonstrated
a
willingness
to
look
behind
the
formalities
of
a
transaction
to
determine
the
underlyingpurpose
of
payments
between
health
care
providers
and
actual
or
potential
referral
sources.
Generally,
courts
have
taken
a
broad
interpretation
of
the
scope
of
theAnti-kickback
Law,
holding
that
the
statute
may
be
violated
if
merely
one
purpose
of
a
payment
arrangement
is
to
induce
referrals
or
purchases.







In
addition
to
statutory
exceptions
to
the
Anti-kickback
Law,
regulations
provide
for
a
number
of
safe
harbors.
If
an
arrangement
meets
the
provisions
of
asafe
harbor,
it
is
deemed
not
to
violate
the
Anti-kickback
Law.
An
arrangement
must
fully
comply
with
each
element
of
an
applicable
safe
harbor
in
order
toqualify
for
protection.
There
are
no
regulatory
safe
harbors
to
California's
Section
650.







Among
the
safe
harbors
that
may
be
relevant
to
us
is
the
discount
safe
harbor.
The
discount
safe
harbor
potentially
applies
to
discounts
provided
by
providersand
suppliers,
including
laboratories,
to
physicians
or
institutions.
If
the
terms
of
the
discount
safe
harbor
are
met,
the
discounts
will
not
be
considered
prohibitedremuneration
under
the
Anti-kickback
Law.
California
does
not
have
a
discount
safe
harbor.
However,
as
noted
above,
Section
650
has
generally
been
interpretedconsistent
with
the
Anti-kickback
Law.33Table
of
Contents







The
personal
services
safe
harbor
to
the
Anti-kickback
Law
provides
that
remuneration
paid
to
a
referral
source
for
personal
services
will
not
violate
the
Anti-kickback
Law
provided
all
of
the
elements
of
that
safe
harbor
are
met.
One
element
is
that
if
the
agreement
is
intended
to
provide
for
the
services
of
the
physicianon
a
periodic,
sporadic
or
part-time
basis,
rather
than
on
a
full-time
basis
for
the
term
of
the
agreement,
the
agreement
specifies
exactly
the
schedule
of
suchintervals,
their
precise
length,
and
the
exact
charge
for
such
intervals.
Our
personal
services
arrangements
with
some
physicians
may
not
meet
the
specificrequirement
of
this
safe
harbor
that
the
agreement
specify
exactly
the
schedule
of
the
intervals
of
time
to
be
spent
on
the
services
because
the
nature
of
the
services,such
as
speaking
engagements,
does
not
lend
itself
to
exact
scheduling
and
therefore
meeting
this
element
of
the
personal
services
safe
harbor
is
impractical.Failure
to
meet
the
terms
of
the
safe
harbor
does
not
render
an
arrangement
illegal.
Rather,
the
government
may
evaluate
such
arrangements
on
a
case-by-casebasis,
taking
into
account
all
facts
and
circumstances.







While
we
believe
that
we
are
in
compliance
with
the
Anti-kickback
Law
and
Section
650,
there
can
be
no
assurance
that
our
relationships
with
physicians,academic
institutions
and
other
customers
will
not
be
subject
to
investigation
or
challenge
under
such
laws.
If
imposed
for
any
reason,
sanctions
under
the
Anti-kickback
Law
and
Section
650
could
have
a
negative
effect
on
our
business.Other Federal and State Fraud and Abuse Laws







In
addition
to
the
requirements
discussed
above,
several
other
health
care
fraud
and
abuse
laws
could
have
an
effect
on
our
business.
For
example,
provisionsof
the
Social
Security
Act
permit
Medicare
and
Medicaid
to
exclude
an
entity
that
charges
the
federal
health
care
programs
substantially
in
excess
of
its
usualcharges
for
its
services.
The
terms
"usual
charge"
and
"substantially
in
excess"
are
ambiguous
and
subject
to
varying
interpretations.







Further,
the
Federal
False
Claims
Act
prohibits
a
person
from
knowingly
submitting
a
claim,
making
a
false
record
or
statement
in
order
to
secure
payment
orretaining
an
overpayment
by
the
federal
government.
In
addition
to
actions
initiated
by
the
government
itself,
the
statute
authorizes
actions
to
be
brought
on
behalfof
the
federal
government
by
a
private
party
having
knowledge
of
the
alleged
fraud.
Because
the
complaint
is
initially
filed
under
seal,
the
action
may
be
pendingfor
some
time
before
the
defendant
is
even
aware
of
the
action.
If
the
government
is
ultimately
successful
in
obtaining
redress
in
the
matter
or
if
the
plaintiffsucceeds
in
obtaining
redress
without
the
government's
involvement,
then
the
plaintiff
will
receive
a
percentage
of
the
recovery.
Finally,
the
Social
Security
Actincludes
its
own
provisions
that
prohibit
the
filing
of
false
claims
or
submitting
false
statements
in
order
to
obtain
payment.
Violation
of
these
provisions
mayresult
in
fines,
imprisonment
or
both,
and
possible
exclusion
from
Medicare
or
Medicaid
programs.
California
has
an
analogous
state
false
claims
act
applicable
toall
payers,
as
do
many
other
states;
however,
we
may
not
be
aware
of
all
such
rules
and
statutes
and
cannot
provide
assurance
that
we
will
be
in
compliance
withall
such
laws
and
regulations.International







Many
countries
in
which
we
may
offer
Afirma
in
the
future
have
anti-kickback
regulations
prohibiting
providers
from
offering,
paying,
soliciting
or
receivingremuneration,
directly
or
indirectly,
in
order
to
induce
business
that
is
reimbursable
under
any
national
health
care
program.
In
situations
involving
physiciansemployed
by
state-funded
institutions
or
national
health
care
agencies,
violation
of
the
local
anti-kickback
law
may
also
constitute
a
violation
of
the
United
StatesForeign
Corrupt
Practices
Act,
or
FCPA.







The
FCPA
prohibits
any
U.S.
individual,
business
entity
or
employee
of
a
U.S.
business
entity
to
offer
or
provide,
directly
or
through
a
third
party,
includingany
potential
distributors
we
may
rely
on
in
certain
markets,
anything
of
value
to
a
foreign
government
official
with
corrupt
intent
to
influence
an
award
orcontinuation
of
business
or
to
gain
an
unfair
advantage,
whether
or
not
such
conduct
violate
local
laws.
In34Table
of
Contentsaddition,
it
is
illegal
for
a
company
that
reports
to
the
SEC
to
have
false
or
inaccurate
books
or
records
or
to
fail
to
maintain
a
system
of
internal
accountingcontrols.
We
will
also
be
required
to
maintain
accurate
information
and
control
over
sales
and
distributors'
activities
that
may
fall
within
the
purview
of
the
FCPA,its
books
and
records
provisions
and
its
anti-bribery
provisions.







The
standard
of
intent
and
knowledge
in
the
Anti-Bribery
cases
is
minimal—intent
and
knowledge
are
usually
inferred
from
that
fact
that
bribery
took
place.The
accounting
provisions
do
not
require
intent.
Violations
of
the
FCPA's
anti-bribery
provisions
for
corporations
and
other
business
entities
are
subject
to
a
fine
ofup
to
$2
million
and
officers,
directors,
stockholders,
employees,
and
agents
are
subject
to
a
fine
of
up
to
$100,000
and
imprisonment
for
up
to
five
years.
Othercountries,
including
the
United
Kingdom
and
other
OECD
Anti-Bribery
Convention
members,
have
similar
anti-corruption
regulations,
such
as
the
UnitedKingdom
Bribery
Act.







When
marketing
our
tests
outside
of
the
United
States,
we
may
be
subject
to
foreign
regulatory
requirements
governing
human
clinical
testing,
prohibitions
onthe
import
of
tissue
necessary
for
us
to
perform
our
tests
or
restrictions
on
the
export
of
tissue
imposed
by
countries
outside
of
the
United
States
or
the
import
oftissue
into
the
United
States,
and
marketing
approval.
These
requirements
vary
by
jurisdiction,
differ
from
those
in
the
United
States
and
may
in
some
cases
requireus
to
perform
additional
pre-clinical
or
clinical
testing.
In
many
countries
outside
of
the
United
States,
coverage,
pricing
and
reimbursement
approvals
are
alsorequired.California Laboratory Licensing







In
addition
to
federal
certification
requirements
of
laboratories
under
CLIA,
licensure
is
required
and
maintained
for
our
South
San
Francisco
clinicalreference
laboratory
under
California
law.
Such
laws
establish
standards
for
the
day-to-day
operation
of
a
clinical
reference
laboratory,
including
the
training
andskills
required
of
personnel
and
quality
control.
In
addition,
California
laws
mandate
proficiency
testing,
which
involves
testing
of
specimens
that
have
beenspecifically
prepared
for
the
laboratory.







If
our
clinical
reference
laboratory
is
out
of
compliance
with
California
standards,
the
California
Department
of
Health
Services,
or
DHS,
may
suspend,restrict
or
revoke
our
license
to
operate
our
clinical
reference
laboratory,
assess
substantial
civil
money
penalties,
or
impose
specific
corrective
action
plans.
Anysuch
actions
could
materially
affect
our
business.
We
maintain
a
current
license
in
good
standing
with
DHS.
However,
we
cannot
provide
assurance
that
DHS
willat
all
times
in
the
future
find
us
to
be
in
compliance
with
all
such
laws.New York Laboratory Licensing







Our
clinical
reference
laboratories
are
required
to
be
licensed
by
New
York,
under
New
York
laws
and
regulations
before
we
receive
specimens
from
NewYork
State.
The
license
establishes
standards
for:•quality
management
systems;
•qualifications,
responsibilities,
and
training;
•facility
design
and
resource
management;
•pre-analytic,
analytic
(including
validation
and
quality
control),
and
post-analytic
systems;
and
•quality
assessments
and
improvements.







New
York
law
also
mandates
proficiency
testing
for
laboratories
licensed
under
New
York
state
law,
regardless
of
whether
such
laboratories
are
located
inNew
York.
If
a
laboratory
is
out
of
compliance
with
New
York
statutory
or
regulatory
standards,
the
New
York
State
Department
of
Health,
or
NYDOH,
maysuspend,
limit,
revoke
or
annul
the
laboratory's
New
York
license,
censure
the
holder
of
the
license
or
assess
civil
money
penalties.
Statutory
or
regulatorynoncompliance
may
result
in
a
laboratory's
operator35Table
of
Contentsbeing
found
guilty
of
a
misdemeanor
under
New
York
law.
NYDOH
also
must
approve
the
LDT
before
the
test
is
offered
in
New
York;
approval
has
beenreceived
for
Afirma
and
conditional
approval
has
been
received
for
Percepta.
Should
we
be
found
out
of
compliance
with
New
York
laboratory
standards
ofpractice,
we
could
be
subject
to
such
sanctions,
which
could
harm
our
business.
We
maintain
a
current
license
in
good
standing
with
NYDOH
for
our
South
SanFrancisco
and
Austin
laboratories.
We
cannot
provide
assurance
that
the
NYDOH
will
at
all
times
find
us
to
be
in
compliance
with
applicable
laws.Other States' Laboratory Licensing







In
addition
to
New
York
and
California,
other
states
including
Florida,
Maryland,
Pennsylvania
and
Rhode
Island,
require
licensing
of
out-of-statelaboratories
under
certain
circumstances.
We
have
obtained
licenses
from
states
where
we
believe
we
are
required
to
be
licensed,
and
believe
we
are
in
compliancewith
applicable
licensing
laws.







From
time
to
time,
we
may
become
aware
of
other
states
that
require
out-of-state
laboratories
to
obtain
licensure
in
order
to
accept
specimens
from
the
state,and
it
is
possible
that
other
states
do
have
such
requirements
or
will
have
such
requirements
in
the
future.
If
we
identify
any
other
state
with
such
requirements
or
ifwe
are
contacted
by
any
other
state
advising
us
of
such
requirements,
we
intend
to
comply
with
such
requirements.Corporate Practice of Medicine







Numerous
states,
including
California
and
Texas,
have
enacted
laws
prohibiting
corporations
such
as
us
from
practicing
medicine
and
employing
or
engagingphysicians
to
practice
medicine.
These
laws
are
designed
to
prevent
interference
in
the
medical
decision-making
process
by
anyone
who
is
not
a
licensedphysician.
This
prohibition
is
generally
referred
to
as
the
prohibition
against
the
corporate
practice
of
medicine.
Violation
of
this
prohibition
may
result
in
civil
orcriminal
fines,
as
well
as
sanctions
imposed
against
us
or
the
professional
through
licensing
proceedings.
The
pathologists
who
review
and
classify
thyroid
FNAcytopathology
results
for
Afirma
are
employed
by
Thyroid
Cytopathology
Partners,
a
Texas
professional
association,
pursuant
to
services
agreement
between
usand
TCP.
Pursuant
to
the
agreement,
we
pay
TCP
a
monthly
fee
on
a
per
FNA
basis,
and
TCP
manages
and
supervises
the
pathologists
who
perform
thecytopathology
services
as
a
component
of
Afirma.
TCP
is
managed
by
Pathology
Resources
Consultants,
or
PRC,
which
provides
management
and
other
servicesto
medical
practitioners.
We
have
entered
into
a
services
agreement
with
PRC
in
connection
with
our
arrangement
with
TCP,
pursuant
to
which
we
engaged
PRCexclusively
to
manage
the
pathology
services
being
provided
by
TCP.
Our
agreement
with
PRC
was
effective
until
December
31,
2015
and
thereafterautomatically
renews
every
year
unless
either
party
provides
notice
of
intent
not
to
renew
at
least
twelve
months
prior
to
the
end
of
the
then-current
term.Employees







At
December
31,
2015,
we
had
192
employees,
of
which
38
work
in
laboratory
operations,
27
in
research
and
development
and
clinical
development,
49
inselling
and
marketing,
78
in
general
and
administrative,
including
46
in
billing
and
client
services,
12
in
information
technology
and
11
in
finance.
None
of
ouremployees
are
the
subject
of
collective
bargaining
arrangements,
and
our
management
considers
its
relationships
with
employees
to
be
good.Environmental
Matters







Our
operations
require
the
use
of
hazardous
materials
(including
biological
materials)
which
subject
us
to
a
variety
of
federal,
state
and
local
environmentaland
safety
laws
and
regulations.
Some
of
these
regulations
provide
for
strict
liability,
holding
a
party
potentially
liable
without
regard
to
fault
or
negligence.
Wecould
be
held
liable
for
damages
and
fines
as
a
result
of
our,
or
others',
business
operations36Table
of
Contentsshould
contamination
of
the
environment
or
individual
exposure
to
hazardous
substances
occur.
We
cannot
predict
how
changes
in
laws
or
new
regulations
willaffect
our
business,
operations
or
the
cost
of
compliance.Raw
Materials
and
Suppliers







We
procure
reagents,
equipment,
chips
and
other
materials
we
use
to
perform
our
tests
from
sole
suppliers.
We
also
purchase
components
used
in
ourcollection
kits
from
sole-source
suppliers.
Some
of
these
items
are
unique
to
these
suppliers
and
vendors.
In
addition,
we
utilize
a
sole
source
to
assemble
anddistribute
our
sample
collection
kits.
While
we
have
developed
alternate
sourcing
strategies
for
these
materials
and
vendors,
we
cannot
be
certain
whether
thesestrategies
will
be
effective
or
whether
alternative
sources
will
be
available
when
we
need
them.
If
these
suppliers
can
no
longer
provide
us
with
the
materials
weneed
to
perform
the
tests
and
for
our
collection
kits,
if
the
materials
do
not
meet
our
quality
specifications,
if
we
cannot
obtain
acceptable
substitute
materials,
or
ifwe
elect
to
change
suppliers,
an
interruption
in
test
processing
could
occur
and
we
may
not
be
able
to
deliver
patient
reports
and
may
incur
higher
one-timeswitching
costs.
Any
such
interruption
may
significantly
affect
our
future
revenue,
cause
us
to
incur
higher
costs,
and
harm
our
customer
relationships
andreputation.
In
addition,
in
order
to
mitigate
these
risks,
we
maintain
inventories
of
these
supplies
at
higher
levels
than
would
be
the
case
if
multiple
sources
ofsupply
were
available.
If
our
test
volume
decreases
or
we
switch
suppliers,
we
may
hold
excess
inventory
with
expiration
dates
that
occur
before
use
which
wouldadversely
affect
our
losses
and
cash
flow
position.
As
we
introduce
any
new
test,
we
may
experience
supply
issues
as
we
ramp
sales.Legal
Proceedings







From
time
to
time,
we
may
be
party
to
lawsuits
in
the
ordinary
course
of
business.
We
are
currently
not
a
party
to
any
material
legal
proceedings.Available
Information







We
were
incorporated
in
Delaware
as
Calderome,
Inc.
in
August
2006.
Calderome
operated
as
an
incubator
until
early
2008.
We
changed
our
name
toVeracyte,
Inc.
in
March
2008.
Our
principal
executive
offices
are
located
at
6000
Shoreline
Court,
Suite
300,
South
San
Francisco,
California
94080
and
ourtelephone
number
is
(650)
243-6300.
Our
website
address
is
www.veracyte.com.
The
information
contained
on,
or
that
can
be
accessed
through,
our
website
is
notpart
of
this
annual
report
on
Form
10-K.







We
make
available
free
of
charge
on
our
website
our
annual
report
on
Form
10-K,
quarterly
reports
on
Form
10-Q,
current
reports
on
Form
8-K
andamendments
to
those
reports
as
soon
as
reasonably
practicable
after
we
electronically
file
such
material
with,
or
furnish
it
to,
the
Securities
and
ExchangeCommission,
or
SEC.
The
reports
are
also
available
at
www.sec.gov .37Table
of
ContentsITEM
1A.



RISK
FACTORS
Risks
Related
to
Our
BusinessWe are an early-stage company with a history of losses, and we expect to incur net losses for the foreseeable future and may never achieve or sustainprofitability.







We
have
incurred
net
losses
since
our
inception.
For
the
year
ended
December
31,
2015,
we
had
a
net
loss
of
$33.7
million
and
we
expect
to
incur
additionallosses
in
2016
and
in
future
years.
As
of
December
31,
2015,
we
had
an
accumulated
deficit
of
$148.7
million.
We
may
never
achieve
revenue
sufficient
to
offsetour
expenses.
Over
the
next
several
years,
we
expect
to
continue
to
devote
substantially
all
of
our
resources
to
increase
adoption
of,
and
reimbursement
for,Afirma,
as
well
as
our
lung
cancer
test,
Percepta,
which
we
launched
in
April
2015,
and
the
development
of
additional
tests
we
plan
to
commercialize,
includingour
test
for
Idiopathic
Pulmonary
Fibrosis,
or
IPF.
We
may
never
achieve
or
sustain
profitability,
and
our
failure
to
achieve
and
sustain
profitability
in
the
futurecould
cause
the
market
price
of
our
common
stock
to
decline.Our financial results depend solely on sales of Afirma, and we will need to generate sufficient revenue from this and other diagnostic solutions to grow ourbusiness.







All
of
our
revenues
have
been
derived
from
the
sale
of
Afirma,
which
we
commercially
launched
in
January
2011.
For
the
foreseeable
future,
we
expect
toderive
substantially
all
of
our
revenue
from
sales
of
Afirma.
We
launched
our
first
product
in
pulmonology
for
lung
cancer,
Percepta,
in
April
2015,
and
our
effortsmay
not
be
successful.
In
addition,
we
are
in
various
stages
of
research
and
development
for
other
diagnostic
solutions
that
we
may
offer,
but
there
can
be
noassurance
that
we
will
be
able
to
identify
other
diseases
that
can
be
effectively
addressed
with
our
molecular
cytology
platform
or,
if
we
are
able
to
identify
suchdiseases,
whether
or
when
we
will
be
able
to
successfully
commercialize
these
solutions.
If
we
are
unable
to
increase
sales
and
expand
reimbursement
for
Afirma,or
successfully
commercialize
Percepta
and
develop
and
commercialize
other
solutions,
our
revenue
and
our
ability
to
achieve
and
sustain
profitability
would
beimpaired,
and
the
market
price
of
our
common
stock
could
decline.We depend on a few payers for a significant portion of our revenue and if one or more significant payers stops providing reimbursement or decreases theamount of reimbursement for our tests, our revenue could decline.







Revenue
for
tests
performed
on
patients
covered
by
Medicare,
UnitedHealthcare
and
Aetna
was
26%,14%
and
9%,
respectively,
of
our
revenue
for
the
yearended
December
31,
2015,
compared
with
26%,
18%
and
11%,
respectively,
in
the
year
ended
December
31,
2014.
The
percentage
of
our
revenue
derived
fromsignificant
payers
is
expected
to
fluctuate
from
period
to
period
as
our
revenue
increases,
as
additional
payers
provide
reimbursement
for
our
tests
or
if
one
or
morepayers
were
to
stop
reimbursing
for
our
tests
or
change
their
reimbursed
amounts.
Effective
January
2012,
Palmetto
GBA,
the
regional
Medicare
administrativecontractor,
or
MAC,
that
handled
claims
processing
for
Medicare
services
with
jurisdiction
at
that
time,
issued
coverage
and
payment
determinations
for
the
GeneExpression
Classifier,
or
GEC.
On
a
five-year
rotational
basis,
Medicare
requests
bids
for
its
regional
MAC
services.
Any
future
changes
in
the
MAC
processing
orcoding
for
Medicare
claims
for
the
Afirma
GEC
could
result
in
a
change
in
the
coverage
or
reimbursement
rates
for
such
products,
or
the
loss
of
coverage.







On
March
1,
2015,
a
separate
CPT
code,
or
Current
Procedural
Terminology
code,
for
the
Afirma
GEC
was
issued.
The
new
code
became
effective
January
1,2016.
In
November
2015,
the
Centers
for
Medicare
&
Medicaid
Services,
or
CMS,
issued
a
final
determination
for
the
2016
Clinical
Lab
Fee
Schedule,
or
CLFS,to
establish
a
national
limitation
amount
for
this
new
CPT
code
under
the
gapfill
process
through
the
regional
MACs
during
calendar
year
2016.
We
do
not
yetknow
whether
the
gapfill
process
for
our
new
CPT
code
for
Afirma
will
impact
the
current
Medicare
payment
rate.
Approximately
20%
of
our
GEC
patients
arecovered
by
Medicare.
Additionally,
if
commercial
payers
tie
their38Table
of
Contentsreimbursement
rates
to
Medicare
rates,
the
rates
at
which
these
payers
reimbursement
for
our
test
could
be
negatively
affected.







Although
we
have
entered
into
contracts
with
certain
third-party
payers
which
establish
in-network
allowable
rates
of
reimbursement
for
our
Afirma
tests,payers
may
suspend
or
discontinue
reimbursement
at
any
time,
may
require
or
increase
co-payments
from
patients,
or
may
reduce
the
reimbursement
rates
paid
tous.
Any
such
actions
could
have
a
negative
effect
on
our
revenue.If payers do not provide reimbursement, rescind or modify their reimbursement policies, delay payments for our tests, recoup past payments, or if we areunable to successfully negotiate additional reimbursement contracts, our commercial success could be compromised.







Physicians
may
not
order
our
tests
unless
payers
reimburse
a
substantial
portion
of
the
test
price.
There
is
significant
uncertainty
concerning
third-partyreimbursement
of
any
test
incorporating
new
technology,
including
our
tests.
Reimbursement
by
a
payer
may
depend
on
a
number
of
factors,
including
a
payer'sdetermination
that
these
tests
are:•not
experimental
or
investigational;
•pre-authorized
and
appropriate
for
the
specific
patient;
•cost-effective;
•supported
by
peer-reviewed
publications;
and
•included
in
clinical
practice
guidelines.







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







We
do
not
have
a
contracted
rate
of
reimbursement
with
many
payers
for
Afirma,
and
we
do
not
have
any
contracted
reimbursement
with
respect
to
Percepta.Without
a
contracted
rate
for
reimbursement,
our
claims
are
often
denied
upon
submission,
and
we
must
appeal
the
claims.
The
appeals
process
is
time
consumingand
expensive,
and
may
not
result
in
payment.
In
cases
where
there
is
not
a
contracted
rate
for
reimbursement,
there
is
typically
a
greater
patient
co-insurance
orco-payment
requirement
which
may
result
in
further
delay
or
decreased
likelihood
of
collection.
Payers
may
attempt
to
recoup
prior
payments
after
review,sometimes
after
significant
time
has
passed,
which
would
impact
future
revenue.







We
expect
to
continue
to
focus
substantial
resources
on
increasing
adoption,
coverage
and
reimbursement
for
Afirma
GEC,
Afirma
Malignancy
Classifiers,launched
in
May
2014,
Percepta,
launched
in
2015,
as
well
as
any
other
future
tests
we
may
develop.
We
believe
it
will
take
several
years
to
achieve
coverage
andcontracted
reimbursement
with
a
majority
of
third-party
payers.
However,
we
cannot
predict
whether,
under
what
circumstances,
or
at
what
payment
levels
payerswill
reimburse
for
our
tests.
Also,
payer
consolidation
is
underway
and
creates
uncertainty
as
to
whether
coverage
and
contracts
with
existing
payers
will
remain
ineffect.
Finally,
commercial
payers
may
tie
their
allowable
rates
to
Medicare
rates,
and
should
Medicare
reduce
their
rates,
we
may
be
negatively
impacted.
Ourfailure
to
establish
broad
adoption
of
and
reimbursement
for
our
tests,
or
our
inability
to
maintain
existing
reimbursement
from
payers,
will
negatively
impact
ourability
to
generate
revenue
and
achieve
profitability,
as
well
as
our
future
prospects
and
our
business.We may experience limits on our revenue if physicians decide not to order our tests.







If
we
are
unable
to
create
or
maintain
demand
for
our
tests
in
sufficient
volume,
we
may
not
become
profitable.
To
generate
demand,
we
will
need
to
continueto
educate
physicians
about
the
benefits
and
cost-effectiveness
of
our
tests
through
published
papers,
presentations
at
scientific
conferences,
marketing
campaignsand
one-on-one
education
by
our
sales
force.
In
addition,
our
ability
to
obtain
and
maintain
adequate
reimbursement
from
third-party
payers
will
be
critical
togenerating
revenue.39Table
of
Contents







Several
existing
guidelines
and
historical
practices
in
the
United
States
regarding
indeterminate
thyroid
nodule
fine
needle
aspiration,
or
FNA,
resultsrecommend
a
full
or
partial
surgical
thyroidectomy
in
most
cases.
Accordingly,
physicians
may
be
reluctant
to
order
a
diagnostic
solution
that
may
suggest
surgeryis
unnecessary
where
some
current
guidelines
and
historical
practice
have
typically
led
to
such
procedures.
Moreover,
our
diagnostic
services
often
are
performedat
a
specialized
clinical
reference
laboratory
rather
than
by
a
pathologist
in
a
local
laboratory,
so
pathologists
may
be
reluctant
to
support
our
services.
In
addition,guidelines
for
the
diagnosis
and
treatment
of
thyroid
nodules
may
subsequently
be
revised
to
recommend
another
type
of
treatment
protocol,
and
these
changesmay
result
in
medical
practitioners
deciding
not
to
use
Afirma.
These
facts
may
make
physicians
reluctant
to
convert
to
using
or
continuing
to
use
Afirma,
whichcould
limit
our
ability
to
generate
revenue
and
our
ability
to
achieve
profitability.
To
the
extent
international
markets
have
existing
practices
and
standards
of
carethat
are
different
than
those
in
the
United
States,
we
may
face
challenges
with
the
adoption
of
Afirma
outside
the
United
States.Due to how we recognize revenue, our quarterly operating results are likely to fluctuate.







We
recognize
a
large
portion
of
our
revenue
upon
the
earlier
of
receipt
of
third-party
payer
notification
of
payment
or
when
cash
is
received.
We
have
littlevisibility
as
to
when
we
will
receive
payment
for
our
diagnostic
test,
and
we
must
appeal
negative
payment
decisions,
which
delays
collections.
We
may
receive
alarge
number
of
past
payments
from
a
payer
all
at
once
which
might
cause
a
one-time
increase
in
revenues.
For
tests
performed
where
we
have
an
agreed
uponreimbursement
rate
or
we
are
able
to
estimate
the
amount
that
will
ultimately
be
realized
at
the
time
delivery
is
complete,
such
as
in
the
case
of
Medicare
andcertain
other
payers,
we
recognize
the
related
revenue
upon
delivery
of
a
patient
report
to
the
prescribing
physician
based
on
the
established
billing
rate
lesscontractual
and
other
adjustments
to
arrive
at
the
amount
that
we
expect
to
realize.
We
determine
the
amount
we
expect
to
realize
based
on
a
per
payer,
per
contractor
agreement
basis.
In
the
first
period
in
which
revenue
is
accrued
for
a
particular
payer,
there
generally
is
a
one-time
increase
in
revenue.
In
situations
where
wecannot
estimate
the
amount
that
will
ultimately
be
collected,
we
recognize
revenue
upon
the
earlier
of
receipt
of
third-party
notification
of
payment
or
when
cash
isreceived.
Upon
ultimate
collection,
the
amount
received
from
Medicare
and
other
payers
where
reimbursement
was
estimated
is
compared
to
previous
estimatesand
the
contractual
allowance
is
adjusted
accordingly.
These
factors
will
likely
result
in
fluctuations
in
our
quarterly
revenue.
Should
we
recognize
revenue
frompayers
on
an
accrual
basis
and
later
determine
the
judgments
underlying
estimated
reimbursement
change,
or
were
incorrect
at
the
time
we
accrued
such
revenue,our
financial
results
could
be
negatively
impacted
in
future
quarters.
As
a
result,
comparing
our
operating
results
on
a
period-to-period
basis
may
not
bemeaningful.
You
should
not
rely
on
our
past
results
as
an
indication
of
our
future
performance.
In
addition,
these
fluctuations
in
revenue
may
make
it
difficult
forus,
research
analysts
and
investors
to
accurately
forecast
our
revenue
and
operating
results.
If
our
revenue
or
operating
results
fall
below
expectations,
the
price
ofour
common
stock
would
likely
decline.We rely on sole suppliers for some of the reagents, equipment, chips and other materials used to perform our tests, and we may not be able to find replacementsor transition to alternative suppliers.







We
rely
on
sole
suppliers
for
critical
supply
of
reagents,
equipment,
chips
and
other
materials
that
we
use
to
perform
our
tests.
We
also
purchase
componentsused
in
our
collection
kits
from
sole-source
suppliers.
Some
of
these
items
are
unique
to
these
suppliers
and
vendors.
In
addition,
we
utilize
a
sole
source
toassemble
and
distribute
our
sample
collection
kits.
While
we
have
developed
alternate
sourcing
strategies
for
these
materials
and
vendors,
we
cannot
be
certainwhether
these
strategies
will
be
effective
or
the
alternative
sources
will
be
available
when
we
need
them.
If
these
suppliers
can
no
longer
provide
us
with
thematerials
we
need
to
perform
the
tests
and
for
our
collection
kits,
if
the
materials
do
not
meet
our
quality
specifications,
if
we
cannot
obtain
acceptable
substitutematerials,
or
if
we
elect
to
change
suppliers,
an
interruption
in
test
processing
could
occur,
we
may
not
be
able
to
deliver
patient
reports
and
we
may40Table
of
Contentsincur
higher
one-time
switching
costs.
Any
such
interruption
may
significantly
affect
our
future
revenue,
cause
us
to
incur
higher
costs,
and
harm
our
customerrelationships
and
reputation.
In
addition,
in
order
to
mitigate
these
risks,
we
maintain
inventories
of
these
supplies
at
higher
levels
than
would
be
the
case
ifmultiple
sources
of
supply
were
available.
If
our
test
volume
decreases
or
we
switch
suppliers,
we
may
hold
excess
inventory
with
expiration
dates
that
occurbefore
use
which
would
adversely
affect
our
losses
and
cash
flow
position.
As
we
introduce
any
new
test,
we
may
experience
supply
issues
as
we
ramp
sales.We depend on a specialized cytopathology practice to perform the cytopathology component of Afirma, and our ability to perform our diagnostic solutionwould be harmed if we were required to secure a replacement.







We
rely
on
Thyroid
Cytopathology
Partners,
P.A.,
or
TCP,
to
provide
cytopathology
professional
diagnoses
on
thyroid
FNA
samples
pursuant
to
a
pathologyservices
agreement.
Pursuant
to
this
agreement,
TCP
has
the
exclusive
right
to
provide
the
cytopathology
diagnoses
on
FNA
samples
at
a
fixed
price
per
test.
Wehave
also
agreed
to
allow
TCP
to
co-locate
in
a
portion
of
our
facilities
in
Austin,
Texas.
Our
agreement
with
TCP
is
effective
through
December
31,
2015
andthereafter
automatically
renews
every
year
unless
either
party
provides
notice
of
intent
not
to
renew
at
least
12
months
prior
to
the
end
of
the
then-current
term.







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







As
demand
for
Afirma
and
Percepta
grows,
we
will
need
to
continue
to
scale
our
testing
capacity
and
processing
technology,
expand
customer
service,
billingand
systems
processes
and
enhance
our
internal
quality
assurance
program.
We
will
also
need
additional
certified
laboratory
scientists
and
other
scientific
andtechnical
personnel
to
process
higher
volumes
of
our
tests.
We
cannot
assure
you
that
any
increases
in
scale,
related
improvements
and
quality
assurance
will
besuccessfully
implemented
or
that
appropriate
personnel
will
be
available.
Failure
to
implement
necessary
procedures,
transition
to
new
processes
or
hire
thenecessary
personnel
could
result
in
higher
costs
of
processing
tests,
quality
control
issues
or
inability
to
meet
demand.
There
can
be
no
assurance
that
we
will
beable
to
perform
our
testing
on
a
timely
basis
at
a
level
consistent
with
demand,
or
that
our
efforts
to
scale
our
operations
will
not
negatively
affect
the
quality
of
testresults.
If
we
encounter
difficulty
meeting
market
demand
or
quality
standards,
our
reputation
could
be
harmed
and
our
future
prospects
and
our
business
couldsuffer.Changes in healthcare policy, including legislation reforming the U.S. healthcare system, may have a material adverse effect on our financial condition andoperations.







The
Patient
Protection
and
Affordable
Care
Act,
as
amended
by
the
Health
Care
and
Education
Affordability
Reconciliation
Act,
collectively
the
ACA,enacted
in
March
2010,
makes
changes
that
are
expected
to
significantly
affect
the
pharmaceutical
and
medical
device
industries
and
clinical
laboratories.
EffectiveJanuary
1,
2013,
the
ACA
includes
a
2.3%
excise
tax
on
the
sale
of
certain
medical
devices
sold
outside
of
the
retail
setting.
Although
a
moratorium
has
beenimposed
on
this
excise
tax
for
2016
and
2017,
the
excise
tax
is
scheduled
to
be
restored
in
2018.
Although
the
FDA
has
issued
draft
guidance
that,
if
finalized,would
regulate
certain
laboratory
developed
tests,
or
LDTs,
as
medical
devices,
our
tests
are
not
currently
listed
as
medical
devices
with
the
FDA.
We
cannotassure
you
that
the
tax
will
not
be
extended
to
services
such
as
ours
in
the
future
if
our
tests
were
to
be
regulated
as
devices.41Table
of
Contents







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







In
addition
to
the
ACA,
the
effect
of
which
on
our
business
cannot
presently
be
fully
quantified,
various
healthcare
reform
proposals
have
also
emerged
fromfederal
and
state
governments.
For
example,
in
February
2012,
Congress
passed
the
Middle
Class
Tax
Relief
and
Job
Creation
Act
of
2012,
which
in
part
resets
theclinical
laboratory
payment
rates
on
the
Medicare
CLFS
by
2%
in
2013.
In
addition,
under
the
Budget
Control
Act
of
2011,
which
is
effective
for
dates
of
serviceon
or
after
April
1,
2013,
Medicare
payments,
including
payments
to
clinical
laboratories,
are
subject
to
a
reduction
of
2%
due
to
the
automatic
expense
reductions(sequester)
until
fiscal
year
2024.
Reductions
resulting
from
the
Congressional
sequester
are
applied
to
total
claims
payment
made;
however,
they
do
not
currentlyresult
in
a
rebasing
of
the
negotiated
or
established
Medicare
or
Medicaid
reimbursement
rates.







State
legislation
on
reimbursement
applies
to
Medicaid
reimbursement
and
Managed
Medicaid
reimbursement
rates
within
that
state.
Some
states
have
passedor
proposed
legislation
that
would
revise
reimbursement
methodology
for
clinical
laboratory
payment
rates
under
those
Medicaid
programs.
We
cannot
predictwhether
future
healthcare
initiatives
will
be
implemented
at
the
federal
or
state
level
or
in
countries
outside
of
the
United
States
in
which
we
may
do
business,
orthe
effect
any
future
legislation
or
regulation
will
have
on
us.
The
taxes
imposed
by
the
new
federal
legislation,
cost
reduction
measures
and
the
expansion
in
therole
of
the
U.S.
government
in
the
healthcare
industry
may
result
in
decreased
revenue,
lower
reimbursement
by
payers
for
our
tests
or
reduced
medical
procedurevolumes,
all
of
which
may
adversely
affect
our
business,
financial
condition
and
results
of
operations.
In
addition,
sales
of
our
tests
outside
the
United
Statessubject
our
business
to
foreign
regulatory
requirements
and
cost-reduction
measures,
which
may
also
change
over
time.







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







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







On
March
1,
2015,
a
separate
CPT
code,
or
Current
Procedural
Terminology
code,
for
the
Afirma
GEC
was
issued.
The
new
code
became
effective
January
1,2016.
In
November
2015,
the
Centers
for
Medicare
&
Medicaid
Services,
or
CMS,
issued
a
final
determination
for
the
2016
CLFS
to
establish
a
national
limitationamount
for
this
new
CPT
code
under
the
gapfill
process
through
the
regional
MACs
during
calendar
year
2016.
We
do
not
yet
know
whether
the
gapfill
process
forour
new
CPT
code
for
Afirma
will
impact
the
current
Medicare
payment
rate.42Table
of
Contents







The
recently
enacted
Protecting
Access
to
Medicare
Act
of
2014,
or
PAMA,
includes
a
substantial
new
payment
system
for
clinical
laboratory
tests
under
theCLFS.
Under
PAMA,
laboratories
that
receive
the
majority
of
their
Medicare
revenues
from
payments
made
under
the
CLFS
would
report,
beginning
January
1,2016,
and
then
on
an
every
three
year
basis
thereafter
(or
annually
for
advanced
diagnostic
laboratory
tests,
or
ADLTs),
private
payer
payment
rates
and
volumesfor
their
tests.
CMS
will
use
the
rates
and
volumes
reported
by
laboratories
to
develop
Medicare
payment
rates
for
the
tests
equal
to
the
volume-weighted
medianof
the
private
payer
payment
rates
for
the
tests.
The
payment
rates
calculated
under
PAMA
will
be
effective
starting
January
1,
2017.
Although
CMS
has
not
yetissued
regulations
to
implement
PAMA,
we
believe
our
Afirma
GEC
as
well
as
our
Percepta
test,
once
covered,
would
be
considered
ADLTs.
We
cannot
assureyou
that
reimbursement
rates
under
the
final
regulation
for
tests
like
ours
will
not
be
adversely
affected.Because of Medicare billing rules, we may not receive reimbursement for all tests provided to Medicare patients.







Under
current
Medicare
billing
rules,
payment
for
our
tests
performed
on
Medicare
beneficiaries
who
were
hospital
inpatients
at
the
time
the
tissue
sampleswere
obtained
and
whose
tests
were
ordered
less
than
14
days
from
discharge
must
be
bundled
into
the
payment
that
the
hospital
receives
for
the
inpatient
servicesprovided.
Medicare
billing
rules
also
require
hospitals
to
bill
for
our
tests
when
ordered
for
hospital
outpatients
less
than
14
days
following
the
date
of
the
hospitalprocedure
where
the
tissue
samples
were
obtained.
Accordingly,
we
are
required
to
bill
individual
hospitals
for
tests
performed
on
Medicare
beneficiaries
duringthese
time
frames.
We
cannot
ensure
that
hospitals
will
pay
us
for
tests
performed
on
patients
falling
under
these
rules.
We
cannot
assure
you
that
Medicare
willnot
change
this
limitation
in
the
future.If the FDA were to begin regulating our tests, we could incur substantial costs and delays associated with trying to obtain premarket clearance or approval.







Clinical
laboratory
tests
like
our
tests
are
regulated
under
the
Clinical
Laboratory
Improvement
Amendments
of
1988,
or
CLIA,
as
well
as
by
applicable
statelaws.
Most
laboratory
developed
tests
are
not
currently
subject
to
FDA
regulation,
although
reagents,
instruments,
software
or
components
provided
by
thirdparties
and
used
to
perform
LDTs
may
be
subject
to
regulation.
We
believe
that
the
Afirma
GEC
and
Percepta
tests
are
LDTs.
FDA
currently
exercises
itsenforcement
discretion
for
LDTs.
In
October
2014,
the
FDA
published
draft
guidance
documents
describing
the
framework
by
which
they
might
regulate
LDTs.The
framework
is
similar
to
the
guidance
they
issued
previously.
There
is
no
timeframe
in
which
the
FDA
must
issue
final
guidance
documents.







If
the
FDA
requires
us
to
seek
clearance
or
approval
to
offer
our
existing
tests
or
any
of
our
future
products
for
clinical
use,
we
may
not
be
able
to
obtain
suchapprovals
on
a
timely
basis,
or
at
all.
If
premarket
review
is
required,
our
business
could
be
negatively
impacted
if
we
are
required
to
stop
selling
our
productspending
their
clearance
or
approval
or
the
launch
of
any
new
products
that
we
develop
could
be
delayed
by
new
requirements.
The
cost
of
conducting
clinical
trialsand
otherwise
developing
data
and
information
to
support
premarket
applications
may
be
significant.
Further,
if
the
FDA
were
to
issue
guidance
requiring
our
ILDtest
to
obtain
FDA
approval
prior
to
commercial
availability,
our
LDT
launch
could
be
delayed.
In
addition,
future
regulation
by
the
FDA
could
subject
ourbusiness
to
further
regulatory
risks
and
costs.
Failure
to
comply
with
applicable
regulatory
requirements
of
the
FDA
could
result
in
enforcement
action,
includingreceiving
untitled
or
warning
letters,
fines,
injunctions,
or
civil
or
criminal
penalties.
In
addition,
we
could
be
subject
to
a
recall
or
seizure
of
current
or
futureproducts,
operating
restrictions,
partial
suspension
or
total
shutdown
of
production.
Any
such
enforcement
action
would
have
a
material
adverse
effect
on
ourbusiness,
financial
condition
and
operations.
In
addition,
our
sample
collection
containers
are
listed
as
Class
I
devices
with
the
FDA.
If
the
FDA
were
to
determinethat
they
are
not
Class
I
devices,
we
would
be
required
to
file
510(k)
applications
and
obtain
FDA
clearance
to
use
the
containers,
which
could
be
time
consumingand
expensive.43Table
of
Contents







Some
of
the
materials
we
use
for
the
Afirma
and
Percepta
tests
and
that
we
may
use
for
future
products
are
labeled
for
research
use
only.
In
November
2013,the
FDA
finalized
guidance
regarding
the
sale
and
use
of
products
labeled
for
research
or
investigational
use
only.
Among
other
things,
the
guidance
advises
thatthe
FDA
continues
to
be
concerned
about
distribution
of
research
or
investigational
use
only
products
intended
for
clinical
diagnostic
use
and
that
themanufacturer's
objective
intent
for
the
product's
intended
use
will
be
determined
by
examining
the
totality
of
circumstances,
including
advertising,
instructions
forclinical
interpretation,
presentations
that
describe
clinical
use,
and
specialized
technical
support,
surrounding
the
distribution
of
the
product
in
question.
The
FDAhas
advised
that
if
evidence
demonstrates
that
a
product
is
inappropriately
labeled
for
research
or
investigational
use
only,
the
device
would
be
misbranded
andadulterated
within
the
meaning
of
the
Federal
Food,
Drug
and
Cosmetic
Act.
Some
of
the
reagents,
instruments,
software
or
components
obtained
by
us
fromsuppliers
for
use
in
our
products
are
currently
labeled
as
investigational
or
research-use
only
products.
If
the
FDA
were
to
undertake
enforcement
actions,
some
ofour
suppliers
might
cease
selling
investigational
or
research-use
only
products
to
us,
and
any
failure
to
obtain
an
acceptable
substitute
could
significantly
andadversely
affect
our
business,
financial
condition
and
results
of
operations,
including
increasing
the
cost
of
testing
or
delaying,
limiting
or
prohibiting
the
purchaseof
reagents,
instruments,
software
or
components
necessary
to
perform
testing.If we are unable to compete successfully, we may be unable to increase or sustain our revenue or achieve profitability.







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







We
also
face
competition
from
companies
and
academic
institutions
that
use
next
generation
sequencing
technology
or
other
methods
to
measure
mutationalmarkers
such
as
BRAF
and
KRAS,
along
with
numerous
other
mutations.
The
organizations
include
Interpace
Diagnostics
Group,
Inc.,
Rosetta
Genomics
Ltd.,Integrated
Diagnostics,
Inc.
and
others
who
are
developing
new
products
or
technologies
that
may
compete
with
our
tests.
In
the
future,
we
may
also
facecompetition
from
companies
developing
new
products
or
technologies
that
are
able
to
compete
with
Afirma's
high
negative
predictive
value
to
rule
out
cancer.







With
the
Percepta
test,
we
believe
our
primary
competition
will
similarly
come
from
traditional
methods
used
by
physicians
to
diagnose
lung
cancer.
We
alsoanticipate
facing
potential
competition
from
companies
offering
or
developing
approaches
for
assessing
malignancy
risk
in
patients
with
lung
nodules
usingalternative
samples,
such
as
blood,
urine
or
sputum.
However,
such
"liquid
biopsies"
are
often
used
earlier
in
the
diagnostic
paradigm—for
instance,
to
screen
forcancer—or
to
gauge
risk
of
recurrence
or
response
to
treatment.







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







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







To
compete
successfully,
we
must
be
able
to
demonstrate,
among
other
things,
that
our
diagnostic
test
results
are
accurate
and
cost
effective,
and
we
mustsecure
a
meaningful
level
of
reimbursement
for
our
products.44Table
of
Contents







Many
of
our
potential
competitors
have
widespread
brand
recognition
and
substantially
greater
financial,
technical
and
research
and
development
resources,and
selling
and
marketing
capabilities
than
we
do.
Others
may
develop
products
with
prices
lower
than
ours
that
could
be
viewed
by
physicians
and
payers
asfunctionally
equivalent
to
our
solution,
or
offer
solutions
at
prices
designed
to
promote
market
penetration,
which
could
force
us
to
lower
the
list
price
of
oursolution
and
affect
our
ability
to
achieve
profitability.
If
we
are
unable
to
change
clinical
practice
in
a
meaningful
way
or
compete
successfully
against
current
andfuture
competitors,
we
may
be
unable
to
increase
market
acceptance
and
sales
of
our
products,
which
could
prevent
us
from
increasing
our
revenue
or
achievingprofitability
and
could
cause
the
market
price
of
our
common
stock
to
decline.
As
we
add
new
tests
and
services,
we
will
face
many
of
these
same
competitiverisks
for
these
new
tests.The loss of members of our senior management team or our inability to attract and retain key personnel could adversely affect our business.







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







In
addition,
our
research
and
development
programs
and
commercial
laboratory
operations
depend
on
our
ability
to
attract
and
retain
highly
skilled
scientists.We
may
not
be
able
to
attract
or
retain
qualified
scientists
and
technicians
in
the
future
due
to
the
intense
competition
for
qualified
personnel
among
life
sciencebusinesses,
particularly
in
the
San
Francisco
Bay
Area.
Our
success
in
the
development
and
commercialization
of
advanced
diagnostics
requires
a
significantmedical
and
clinical
staff
to
conduct
studies
and
educate
physicians
and
payers
on
the
merits
of
our
tests
in
order
to
achieve
adoption
and
reimbursement.
We
are
ina
highly
competitive
industry
to
attract
and
retain
this
talent.
As
a
public
company
located
in
the
San
Francisco
Bay
Area,
we
face
intense
competition
for
highlyskilled
finance
and
accounting
personnel.
If
we
are
unable
to
attract
and
retain
finance
and
accounting
personnel
experienced
in
public
company
financialreporting,
we
risk
being
unable
to
close
our
books
and
file
our
public
documents
on
a
timely
basis.
Additionally,
our
success
depends
on
our
ability
to
attract
andretain
qualified
sales
people.
We
plan
to
significantly
expand
our
sales
force
for
Afirma
in
2016.
There
can
be
no
assurance
that
they
will
be
successful
inmaintaining
and
growing
the
business.
As
we
plan
to
further
increase
our
sales
channels
for
new
tests
we
commercialize,
we
may
have
difficulties
locating
andrecruiting
additional
sales
personnel
or
retaining
qualified
salespeople,
which
could
cause
a
delay
or
decline
in
the
rate
of
adoption
of
our
tests.
Finally,
ourbusiness
requires
specialized
capabilities
in
reimbursement,
billing,
and
other
areas
and
there
may
be
a
shortage
of
qualified
individuals.
If
we
are
not
able
toattract
and
retain
the
necessary
personnel
to
accomplish
our
business
objectives,
we
may
experience
constraints
that
could
adversely
affect
our
ability
to
supportour
research
and
development,
clinical
laboratory,
sales
and
reimbursement,
billing
and
finance
efforts.
All
of
our
employees
are
at
will,
which
means
that
eitherwe
or
the
employee
may
terminate
their
employment
at
any
time.
We
do
not
carry
key
man
insurance
for
any
of
our
employees.We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.







In
addition
to
the
need
to
scale
our
testing
capacity,
future
growth,
including
our
transition
to
a
multi-product
company
with
international
operations,
willimpose
significant
added
responsibilities
on
management,
including
the
need
to
identify,
recruit,
train
and
integrate
additional
employees
with
the
necessary
skillsto
support
the
growing
complexities
of
our
business.
In
addition,
rapid
and
significant
growth
may
place
strain
on
our
administrative,
financial
and
operationalinfrastructure.
Our
ability
to
manage
our
business
and
growth
will
require
us
to
continue
to
improve
our
operational,
financial
and45Table
of
Contentsmanagement
controls,
reporting
systems
and
procedures.
We
have
implemented
an
internally
developed
data
warehouse,
which
is
critical
to
our
ability
to
track
ourdiagnostic
services
and
patient
reports
delivered
to
physicians,
as
well
as
to
support
our
financial
reporting
systems.
The
time
and
resources
required
to
optimizethese
systems
is
uncertain,
and
failure
to
complete
optimization
in
a
timely
and
efficient
manner
could
adversely
affect
our
operations.
The
move
of
our
laboratoryfacility
to
a
new
location
in
South
San
Francisco
requires
us
to
notify
appropriate
regulatory
agencies,
which
may
result
in
an
inspection
or
audit
of
the
newfacility.
This
disrupts
our
business,
including
the
provision
of
Afirma
GEC
and
Percepta
test
reports,
and
requires
the
continued
investment
of
resources.
If
we
areunable
to
manage
our
growth
effectively,
it
may
be
difficult
for
us
to
execute
our
business
strategy
and
our
business
could
be
harmed.Billing for our diagnostic tests is complex, and we must dedicate substantial time and resources to the billing process to be paid.







Billing
for
clinical
laboratory
testing
services
is
complex,
time
consuming
and
expensive.
Depending
on
the
billing
arrangement
and
applicable
law,
we
billvarious
payers,
including
Medicare,
insurance
companies
and
patients,
all
of
which
have
different
billing
requirements.
We
generally
bill
third-party
payers
for
ourdiagnostic
tests
and
pursue
reimbursement
on
a
case-by-case
basis
where
pricing
contracts
are
not
in
place.
To
the
extent
laws
or
contracts
require
us
to
bill
patientco-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
tests
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
used
for
our
tests;
•incorrect
or
missing
billing
information;
and
•the
resources
required
to
manage
the
billing
and
claims
appeals
process.







Standard
industry
billing
codes,
known
as
CPT
codes,
that
we
use
to
bill
for
cytopathology
do
not
generally
exist
for
our
proprietary
molecular
diagnostictests.
Therefore,
until
such
time
that
we
are
awarded
and
are
able
to
use
a
designated
CPT
code
specific
to
our
tests,
we
use
"miscellaneous"
codes
for
claimsubmissions.
These
codes
can
change
over
time.
When
codes
change,
there
is
a
risk
of
an
error
being
made
in
the
claim
adjudication
process.
These
errors
canoccur
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
paymentprocessing
or
a
reduction
in
the
amount
of
the
payment
received.
Coding
changes,
therefore,
may
have
an
adverse
effect
on
our
revenues.
Even
when
we
receive
adesignated
CPT
code
specific
to
our
tests,
there
can
be
no
assurance
that
payers
will
recognize
these
codes
in
a
timely
manner
or
that
the
process
to
transitioning
tosuch
a
code
and
updating
their
billing
systems
will
not
result
in
errors,
delays
in
payments
and
a
related
increase
in
accounts
receivable
balances.
The
separate
CPTcode
for
the
Afirma
GEC
test
became
effective
January
1,
2016.
There
can
be
no
assurance
that
we
or
our
customers
who
bill
will
not
face
issues
as
the
new
codeis
utilized,
which
could
have
an
adverse
effect
on
our
collection
rates,
revenue,
and
cost
of
collecting.46Table
of
Contents







As
we
introduce
new
tests,
we
will
need
to
add
new
codes
to
our
billing
process
as
well
as
our
financial
reporting
systems.
Failure
or
delays
in
effecting
thesechanges
in
external
billing
and
internal
systems
and
processes
could
negatively
affect
our
revenue
and
cash
flow.







In
October
2015,
CMS
replaced
the
ICD-9
code
set
with
the
ICD-10
code
set.
The
transition
requires
ordering
physicians
to
submit
ICD-10
codes
along
withtheir
requisitions
for
our
tests
with
FNA
samples.
If
physicians
do
not
send
proper
coding
with
requisitions,
electronic
billing
systems
are
not
prepared
for
thetransition,
or
payers
have
not
upgraded
their
systems
to
appropriately
pay
claims
with
the
new
codes,
we
may
experience
delays
in
collecting
payments,
whichwould
impact
our
revenue
recognized
on
a
cash
basis,
and
our
cash
position.







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
as
internalcompliance
policies
and
procedures.
Payers
also
conduct
external
audits
to
evaluate
payments,
which
add
further
complexity
to
the
billing
process.
If
the
payermakes
an
overpayment
determination,
there
is
a
risk
that
we
may
be
required
to
return
some
portion
of
prior
payments
we
have
received.
These
billingcomplexities,
and
the
related
uncertainty
in
obtaining
payment
for
our
tests,
could
negatively
affect
our
revenue
and
cash
flow,
our
ability
to
achieve
profitability,and
the
consistency
and
comparability
of
our
results
of
operations.We rely on a third-party to transmit claims to payers, and any delay in transmitting claims could have an adverse effect on our revenue.







While
we
manage
the
overall
processing
of
claims,
we
rely
on
a
third-party
provider
to
transmit
the
actual
claims
to
payers
based
on
the
specific
payer
billingformat.
We
have
previously
experienced
delays
in
claims
processing
when
our
third-party
provider
made
changes
to
its
invoicing
system,
and
again
when
it
did
notsubmit
claims
to
payers
within
the
timeframe
we
require.
Additionally,
coding
for
diagnostic
tests
may
change,
and
such
changes
may
cause
short-term
billingerrors
that
may
take
significant
time
to
resolve.
If
claims
are
not
submitted
to
payers
on
a
timely
basis
or
are
erroneously
submitted,
or
if
we
are
required
to
switchto
a
different
provider
to
handle
claim
submissions,
we
may
experience
delays
in
our
ability
to
process
these
claims
and
receipt
of
payments
from
payers,
whichwould
have
an
adverse
effect
on
our
revenue
and
our
business.The success of our relationship with Genzyme to co-promote Afirma may have a significant effect on our business.







We
sell
Afirma
in
the
United
States
through
our
internal
sales
team
and
through
our
Amended
and
Restated
U.S.
Co-promotion
Agreement
with
GenzymeCorporation,
or
the
Amended
Agreement.
Under
the
Amended
Agreement,
we
are
required
to
pay
Genzyme
a
co-promotion
fee
that
is
currently
15%
of
our
cashreceipts
from
the
sale
of
the
Afirma
GEC
test.
We
have
also
granted
Genzyme
a
right
of
first
offer
to
co-promote
any
future
thyroid
cancer
product
that
wecommercialize.
On
March
9,
2016,
we
formalized
the
decision
to
conclude
the
Amended
Agreement
with
Genzyme
effective
September
9,
2016.
We
intend
to
hireadditional
sales
personnel
to
support
the
growth
of
Afirma
GEC
and
our
other
thyroid
tests
we
had
previously
co-promoted
with
Genzyme.
If
we
are
unsuccessfulin
transitioning
sales
and
marketing
of
Afirma
from
Genzyme
soley
to
our
internal
sales
and
marketing
personnel,
we
may
experience
declining
test
volumes
andassociated
revenue.







In
February
2015,
we
entered
into
an
Ex-U.S.
Co-promotion
Agreement
with
Genzyme
for
the
promotion
of
the
Afirma
GEC
test
with
exclusivity
in
fivecountries
outside
the
United
States
initially
and
in
other
countries
agreed
to
from
time
to
time.
The
term
of
the
agreement
is
January
1,
2015
and
continues
untilDecember
31,
2019,
with
extension
of
the
agreement
possible
upon
agreement
of
the
parties.
Country-specific
terms
have
been
established
under
this
agreementfor
Brazil
and
Singapore
and
a
right
of
first
negotiation
has
been
established
for
Canada,
the
Netherlands
and
Italy.
We
pay
Genzyme
25%
of
net47Table
of
Contentsrevenue
from
the
sale
of
the
Afirma
GEC
test
in
Brazil
and
Singapore
over
a
five-year
period
commencing
January
1,
2015.
Beginning
in
the
fourth
year
of
theagreement,
if
we
terminate
the
agreement
for
convenience,
we
may
be
required
to
pay
a
termination
fee
contingent
on
the
number
of
GEC
billable
results
generatedoutside
the
United
States.
If
Genzyme
does
not
commit
the
necessary
resources
to
market
and
sell
the
Afirma
GEC
test
outside
the
United
States
to
the
level
of
ourexpectations,
or
if
they
terminate
the
agreement,
we
may
not
realize
the
benefits
of
this
relationship
and
our
ability
to
generate
revenue
in
the
future
may
beharmed.Developing new products involves a lengthy and complex process, and we may not be able to commercialize on a timely basis, or at all, other products we aredeveloping.







We
continually
seek
to
develop
enhancements
to
our
current
test
offerings
and
additional
diagnostic
solutions
that
requires
us
to
devote
considerable
resourcesto
research
and
development.
There
can
be
no
assurance
that
we
will
be
able
to
identify
other
diseases
that
can
be
effectively
addressed
with
our
molecularcytology
platform.
In
addition,
if
we
identify
such
diseases,
we
may
not
be
able
to
develop
products
with
the
diagnostic
accuracy
necessary
to
be
clinically
usefuland
commercially
successful.
We
may
face
challenges
obtaining
sufficient
numbers
of
samples
to
validate
a
genomic
signature
for
a
molecular
diagnostic
product.We
have
recently
launched
the
Percepta
test
and
are
in
the
process
of
developing
a
test
for
interstitial
lung
disease,
specifically
IPF.
We
still
must
complete
studiesthat
meet
the
clinical
evidence
required
to
obtain
reimbursement,
which
studies
are
currently
underway.
Our
product
for
interstitial
lung
diseases
may
not
be
fullydeveloped
and
introduced
as
planned
in
2016.







In
order
to
develop
and
commercialize
diagnostic
tests,
we
need
to:•expend
significant
funds
to
conduct
substantial
research
and
development;
•conduct
successful
analytical
and
clinical
studies;
•scale
our
laboratory
processes
to
accommodate
new
tests;
and
•build
the
commercial
infrastructure
to
market
and
sell
new
products.







Our
product
development
process
involves
a
high
degree
of
risk
and
may
take
several
years.
Our
product
development
efforts
may
fail
for
many
reasons,including:•failure
to
identify
a
genomic
signature
in
biomarker
discovery;
•inability
to
secure
sufficient
numbers
of
samples
at
an
acceptable
cost
and
on
an
acceptable
timeframe
to
conduct
analytical
and
clinical
studies;
or
•failure
of
clinical
validation
studies
to
support
the
effectiveness
of
the
test.







Typically,
few
research
and
development
projects
result
in
commercial
products,
and
success
in
early
clinical
studies
often
is
not
replicated
in
later
studies.
Atany
point,
we
may
abandon
development
of
a
product
candidate
or
we
may
be
required
to
expend
considerable
resources
repeating
clinical
studies,
which
wouldadversely
affect
the
timing
for
generating
potential
revenue
from
a
new
product
and
our
ability
to
invest
in
other
products
in
our
pipeline.
If
a
clinical
validationstudy
fails
to
demonstrate
the
prospectively
defined
endpoints
of
the
study
or
if
we
fail
to
sufficiently
demonstrate
analytical
validity,
we
might
choose
to
abandonthe
development
of
the
product,
which
could
harm
our
business.
In
addition,
competitors
may
develop
and
commercialize
competing
products
or
technologiesfaster
than
us
or
at
a
lower
cost.48Table
of
ContentsWe may acquire businesses or assets, form joint ventures or make investments in other companies or technologies that could harm our operating results, diluteour stockholders' ownership, increase our debt or cause us to incur significant expense.







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







To
finance
any
acquisitions
or
investments,
we
may
choose
to
issue
shares
of
our
stock
as
consideration,
which
would
dilute
the
ownership
of
ourstockholders.
If
the
price
of
our
common
stock
is
low
or
volatile,
we
may
not
be
able
to
acquire
other
companies
for
stock.
Alternatively,
it
may
be
necessary
for
usto
raise
additional
funds
for
these
activities
through
public
or
private
financings.
Additional
funds
may
not
be
available
on
terms
that
are
favorable
to
us,
or
at
all.
Ifthese
funds
are
raised
through
the
sale
of
equity
or
convertible
debt
securities,
dilution
to
our
stockholders
could
result.
Our
current
loan
and
security
agreementcontains
covenants
that
could
limit
our
ability
to
sell
debt
securities
or
obtain
additional
debt
financing
arrangements.If we are unable to develop products to keep pace with rapid technological, medical and scientific change, our operating results and competitive position couldbe harmed.







In
recent
years,
there
have
been
numerous
advances
in
technologies
relating
to
diagnostics,
particularly
diagnostics
that
are
based
on
genomic
information.These
advances
require
us
to
continuously
develop
our
technology
and
to
work
to
develop
new
solutions
to
keep
pace
with
evolving
standards
of
care.
Oursolutions
could
become
obsolete
unless
we
continually
innovate
and
expand
our
product
offerings
to
include
new
clinical
applications.
If
we
are
unable
to
developnew
products
or
to
demonstrate
the
applicability
of
our
products
for
other
diseases,
our
sales
could
decline
and
our
competitive
position
could
be
harmed.If we fail to comply with federal, state and foreign laboratory licensing requirements, we could lose the ability to perform our tests or experience disruptions toour business.







We
are
subject
to
CLIA,
a
federal
law
that
regulates
clinical
laboratories
that
perform
testing
on
specimens
derived
from
humans
for
the
purpose
of
providinginformation
for
the
diagnosis,
prevention
or
treatment
of
disease.
CLIA
regulations
mandate
specific
quality
standards
or
personnel
qualifications
andresponsibilities,
facility
administration,
general
laboratory
systems,
quality
assessment,
quality
control,
pre-analytic,
analytic,
and
post-analytic
systems
andproficiency
testing.
CLIA
certification
is
also
required
in
order
for
us
to
be
eligible
to
bill
state
and
federal
healthcare
programs,
as
well
as
many
private
third-partypayers.
To
renew
these
certifications,
we
are
subject
to
survey
and
inspection
every
two
years.
Moreover,
CLIA
inspectors
may
make
random
inspections
of
ourclinical
reference
laboratories.
With
our
recent
relocation
of
our
South
San
Francisco
CLIA
laboratory
to
our
new
building,
we
may
be
subject
to
additionalinspections
or
audits
by
federal
or
state
regulatory
agencies
to
maintain
our
CLIA
certificate.
If
we
relocate
our
Texas
facility,
we
may
be
subject
to
the
sameinspections
or
audits
at
our
new
facility.49Table
of
Contents







We
are
also
required
to
maintain
state
licenses
to
conduct
testing
in
our
laboratories.
California,
New
York,
Texas,
among
other
states'
laws,
require
that
wemaintain
a
license
and
comply
with
state
regulation
as
a
clinical
laboratory;
including
the
training
and
skills
required
of
personnel
and
quality
control
matters.
Inaddition,
both
of
our
clinical
laboratories
are
required
to
be
licensed
on
a
test-specific
basis
by
New
York
State.
We
have
received
approval
for
the
Afirma
tests
aswell
as
conditional
approval
for
the
Percepta
test,
and
will
be
required
to
obtain
approval
for
any
other
tests
we
may
offer
in
the
future.
New
York
law
alsomandates
proficiency
testing
for
laboratories
licensed
under
New
York
state
law,
regardless
of
whether
such
laboratories
are
located
in
New
York.
Several
otherstates
require
that
we
hold
licenses
to
test
samples
from
patients
in
those
states.
Other
states
may
have
similar
requirements
or
may
adopt
similar
requirements
inthe
future.
If
we
were
to
lose
our
CLIA
certificate
or
California
license
for
our
South
San
Francisco
laboratory,
whether
as
a
result
of
revocation,
suspension
orlimitation,
we
would
no
longer
be
able
to
perform
the
GEC,
which
would
eliminate
our
primary
source
of
revenue
and
harm
our
business.
If
we
were
to
lose
ourCLIA
certificate
for
our
Austin
laboratory,
we
would
need
to
move
the
receipt
and
storage
of
FNAs,
as
well
as
the
slide
preparation
for
cytopathology,
to
SouthSan
Francisco,
which
could
result
in
a
delay
in
processing
tests
during
that
transition
and
increased
costs.
If
we
were
to
lose
our
licenses
issued
by
New
York
or
byother
states
where
we
are
required
to
hold
licenses,
we
would
not
be
able
to
test
specimens
from
those
states.
New
tests
we
may
develop
may
be
subject
to
newapprovals
by
regulatory
bodies
such
as
New
York
State,
and
we
may
not
be
able
to
offer
our
new
tests
until
such
approvals
are
received.







Finally,
we
may
be
subject
to
regulation
in
foreign
jurisdictions
as
we
pursue
offering
our
tests
internationally.
Other
limitations,
such
as
prohibitions
on
theimport
of
tissue
necessary
for
us
to
perform
our
tests
or
restrictions
on
the
export
of
tissue
imposed
by
countries
outside
of
the
United
States
may
constrain
ourability
to
offer
tests
internationally
in
the
future.We may experience limits on our revenue if patients decide not to use our tests.







Some
patients
may
decide
not
to
use
our
tests
because
of
price,
all
or
part
of
which
may
be
payable
directly
by
the
patient
if
the
patient's
insurer
deniesreimbursement
in
full
or
in
part.
There
is
a
growing
trend
among
insurers
to
shift
more
of
the
cost
of
healthcare
to
patients
in
the
form
of
higher
co-payments
orpremiums,
and
this
trend
is
accelerating
which
puts
patients
in
the
position
of
having
to
pay
more
for
our
tests.
Implementation
of
provisions
of
the
ACA
has
alsoresulted
in
increases
in
premiums
and
reductions
in
coverage
for
some
patients.
These
events
may
result
in
patients
delaying
or
forgoing
medical
checkups
ortreatment
due
to
their
inability
to
pay
for
our
tests,
which
could
have
an
adverse
effect
on
our
revenue.Complying with numerous statutes and regulations pertaining to our business is an expensive and time-consuming process, and any failure to comply couldresult in substantial penalties.







Our
operations
are
subject
to
other
extensive
federal,
state,
local,
and
foreign
laws
and
regulations,
all
of
which
are
subject
to
change.
These
laws
andregulations
currently
include,
among
others:•the
Federal
Health
Insurance
Portability
and
Accountability
Act
of
1996,
or
HIPAA,
which
established
comprehensive
federal
standards
withrespect
to
the
privacy
and
security
of
protected
health
information
and
requirements
for
the
use
of
certain
standardized
electronic
transactions,
andamendments
made
in
2013
to
HIPAA
under
the
Health
Information
Technology
for
Economic
and
Clinical
Health
Act,
or
HITECH,
whichstrengthen
and
expand
HIPAA
privacy
and
security
compliance
requirements,
increase
penalties
for
violators,
extend
enforcement
authority
to
stateattorneys
general,
and
impose
requirements
for
breach
notification;
•Medicare
billing
and
payment
regulations
applicable
to
clinical
laboratories;
•the
Federal
Anti-Kickback
Statute,
which
prohibits
knowingly
and
willfully
offering,
paying,
soliciting,
or
receiving
remuneration,
directly
orindirectly,
in
exchange
for
or
to
induce
either
the
referral
of
an
individual,
or
the
furnishing,
arranging
for,
or
recommending
of
an
item
or
servicethat
is
reimbursable,
in
whole
or
in
part,
by
a
federal
health
care
program;50Table
of
Contents•the
Federal
Stark
physician
self-referral
law
(and
state
equivalents),
which
prohibits
a
physician
from
making
a
referral
for
certain
designated
healthservices
covered
by
the
Medicare
program,
including
laboratory
and
pathology
services,
if
the
physician
or
an
immediate
family
member
has
afinancial
relationship
with
the
entity
providing
the
designated
health
services,
unless
the
financial
relationship
falls
within
an
applicable
exceptionto
the
prohibition;
•the
Federal
Civil
Monetary
Penalties
Law,
which
prohibits,
among
other
things,
the
offering
or
transfer
of
remuneration
to
a
Medicare
or
statehealth
care
program
beneficiary
if
the
person
knows
or
should
know
it
is
likely
to
influence
the
beneficiary's
selection
of
a
particular
provider,practitioner,
or
supplier
of
services
reimbursable
by
Medicare
or
a
state
health
care
program,
unless
an
exception
applies;
•the
Federal
False
Claims
Act,
which
imposes
liability
on
any
person
or
entity
that,
among
other
things,
knowingly
presents,
or
causes
to
bepresented,
a
false
or
fraudulent
claim
for
payment
to
the
federal
government;
•other
federal
and
state
fraud
and
abuse
laws,
such
as
anti-kickback
laws,
prohibitions
on
self-referral,
fee-splitting
restrictions,
prohibitions
on
theprovision
of
products
at
no
or
discounted
cost
to
induce
physician
or
patient
adoption,
and
false
claims
acts,
which
may
extend
to
servicesreimbursable
by
any
third-party
payer,
including
private
insurers;
•the
prohibition
on
reassignment
of
Medicare
claims,
which,
subject
to
certain
exceptions,
precludes
the
reassignment
of
Medicare
claims
to
anyother
party;
•the
rules
regarding
billing
for
diagnostic
tests
reimbursable
by
the
Medicare
program,
which
prohibit
a
physician
or
other
supplier
from
marking
upthe
price
of
the
technical
component
or
professional
component
of
a
diagnostic
test
ordered
by
the
physician
or
other
supplier
and
supervised
orperformed
by
a
physician
who
does
not
"share
a
practice"
with
the
billing
physician
or
supplier;
•state
laws
that
prohibit
other
specified
practices
related
to
billing
such
as
billing
physicians
for
testing
that
they
order,
waiving
co-insurance,
co-payments,
deductibles,
and
other
amounts
owed
by
patients,
and
billing
a
state
Medicaid
program
at
a
price
that
is
higher
than
what
is
charged
toother
payers;
and
•the
Foreign
Corrupt
Practices
Act
of
1977,
and
other
similar
laws,
which
apply
to
our
international
activities.







We
have
adopted
policies
and
procedures
designed
to
comply
with
these
laws
and
regulations.
In
the
ordinary
course
of
our
business,
we
conduct
internalreviews
of
our
compliance
with
these
laws.
Our
compliance
is
also
subject
to
governmental
review.
The
growth
of
our
business
and
sales
organization
and
ourexpansion
outside
of
the
United
States
may
increase
the
potential
of
violating
these
laws
or
our
internal
policies
and
procedures.
We
believe
that
we
are
in
materialcompliance
with
all
statutory
and
regulatory
requirements,
but
there
is
a
risk
that
one
or
more
government
agencies
could
take
a
contrary
position.
These
laws
andregulations
are
complex
and
are
subject
to
interpretation
by
the
courts
and
by
government
agencies.
If
one
or
more
such
agencies
alleges
that
we
may
be
inviolation
of
any
of
these
requirements,
regardless
of
the
outcome,
it
could
damage
our
reputation
and
adversely
affect
important
business
relationships
with
thirdparties,
including
managed
care
organizations
and
other
commercial
third-party
payers.
Any
action
brought
against
us
for
violation
of
these
or
other
laws
orregulations,
even
if
we
successfully
defend
against
it,
could
cause
us
to
incur
significant
legal
expenses
and
divert
our
management's
attention
from
the
operationof
our
business.
If
our
operations
are
found
to
be
in
violation
of
any
of
these
laws
and
regulations,
we
may
be
subject
to
any
applicable
penalty
associated
with
theviolation,
including
civil
and
criminal
penalties,
damages
and
fines,
we
could
be
required
to
refund
payments
received
by
us,
and
we
could
be
required
to
curtail
orcease
our
operations.
Any
of
the
foregoing
consequences
could
seriously
harm
our
business
and
our
financial
results.51Table
of
ContentsInternational expansion of our business exposes us to business, regulatory, political, operational, financial and economic risks associated with doing businessoutside of the United States.







Our
business
strategy
includes
international
expansion
in
select
countries,
and
may
include
developing
and
maintaining
physician
outreach
and
educationcapabilities
outside
of
the
United
States,
establishing
agreements
with
laboratories,
and
expanding
our
relationships
with
international
payers.
Doing
businessinternationally
involves
a
number
of
risks,
including:•multiple,
conflicting
and
changing
laws
and
regulations
such
as
tax
laws,
privacy
laws,
export
and
import
restrictions,
employment
laws,
regulatoryrequirements
and
other
governmental
approvals,
permits
and
licenses;
•failure
by
us
to
obtain
regulatory
approvals
where
required
for
the
use
of
our
solution
in
various
countries;
•complexities
associated
with
managing
multiple
payer
reimbursement
regimes,
government
payers
or
patient
self-pay
systems;
•logistics
and
regulations
associated
with
shipping
tissue
samples,
including
infrastructure
conditions
and
transportation
delays;
•challenges
associated
with
establishing
laboratory
partners,
including
proper
sample
collection
techniques,
inventory
management,
sample
logistics,billing
and
promotional
activities;
•limits
on
our
ability
to
penetrate
international
markets
if
we
are
not
able
to
process
tests
locally;
•financial
risks,
such
as
longer
payment
cycles,
difficulty
in
collecting
from
payers,
the
effect
of
local
and
regional
financial
crises,
and
exposure
toforeign
currency
exchange
rate
fluctuations;
•natural
disasters,
political
and
economic
instability,
including
wars,
terrorism,
and
political
unrest,
outbreak
of
disease,
boycotts,
curtailment
oftrade
and
other
business
restrictions;
and
•regulatory
and
compliance
risks
that
relate
to
maintaining
accurate
information
and
control
over
activities
that
may
fall
within
the
purview
of
theForeign
Corrupt
Practices
Act
of
1977,
including
both
its
books
and
records
provisions
and
its
anti-bribery
provisions.







Any
of
these
factors
could
significantly
harm
our
future
international
expansion
and
operations
and,
consequently,
our
revenue
and
results
of
operations.If we are sued for product liability or errors and omissions liability, we could face substantial liabilities that exceed our resources.







The
marketing,
sale
and
use
of
our
current
or
future
tests
could
lead
to
product
liability
claims
if
someone
were
to
allege
that
the
tests
failed
to
perform
as
theywere
designed.
We
may
also
be
subject
to
liability
for
errors
in
the
results
we
provide
to
physicians
or
for
a
misunderstanding
of,
or
inappropriate
reliance
upon,the
information
we
provide.
Our
Afirma
GEC
is
performed
on
FNA
samples
that
are
diagnosed
as
indeterminate
by
standard
cytopathology
review.
We
reportresults
as
benign
or
suspicious
to
the
prescribing
physician.
Under
certain
circumstances,
we
might
report
a
result
as
benign
that
later
proves
to
have
beenmalignant.
This
could
be
the
result
of
the
physician
having
poor
nodule
sampling
in
collecting
the
FNA,
performing
the
FNA
on
a
different
nodule
than
the
onethat
is
malignant
or
failure
of
the
GEC
to
perform
as
intended.
We
may
also
be
subject
to
similar
types
of
claims
related
to
our
Afirma
Malignancy
Classifiers
andour
Percepta
test,
as
well
as
tests
we
may
develop
in
the
future.
A
product
liability
or
errors
and
omissions
liability
claim
could
result
in
substantial
damages
and
becostly
and
time
consuming
for
us
to
defend.
Although
we
maintain
product
liability
and
errors
and
omissions
insurance,
we
cannot
assure
you
that
our
insurancewould
fully
protect
us
from
the
financial
impact
of
defending
against
these
types
of
claims
or
any
judgments,
fines
or
settlement
costs
arising
out
of
any
suchclaims.
Any
product
liability
or
errors
and
omissions
liability
claim
brought
against
us,
with
or
without
merit,
could
increase
our
insurance
rates
or
prevent
us
fromsecuring
insurance
coverage
in
the
future.
Additionally,
any
product
liability
lawsuit
could
cause
injury
to
our
reputation
or
cause
us
to
suspend
sales
of
ourproducts
and
solutions.
The
occurrence
of
any
of
these
events
could
have
an
adverse
effect
on
our
business
and
results
of
operations.52Table
of
ContentsIf our laboratory in South San Francisco becomes inoperable due to an earthquake or either of our laboratories becomes inoperable for any other reason, wewill be unable to perform our testing services and our business will be harmed.







We
perform
all
of
the
Afirma
GEC
and
Percepta
testing
at
our
laboratory
in
South
San
Francisco,
California.
Our
laboratory
in
Austin,
Texas
accepts
andstores
substantially
all
FNA
samples
pending
transfer
to
our
California
laboratory
for
Afirma
GEC
processing.
The
laboratories
and
equipment
we
use
to
performour
tests
would
be
costly
to
replace
and
could
require
substantial
lead
time
to
replace
and
qualify
for
use
if
they
became
inoperable.
Either
of
our
facilities
may
beharmed
or
rendered
inoperable
by
natural
or
man-made
disasters,
including
earthquakes,
flooding
and
power
outages,
which
may
render
it
difficult
or
impossiblefor
us
to
perform
our
testing
services
for
some
period
of
time
or
to
receive
and
store
samples.
The
inability
to
perform
our
tests
for
even
a
short
period
of
time
mayresult
in
the
loss
of
customers
or
harm
our
reputation,
and
we
may
be
unable
to
regain
those
customers
in
the
future.
Although
we
maintain
insurance
for
damage
toour
property
and
the
disruption
of
our
business,
this
insurance
may
not
be
sufficient
to
cover
all
of
our
potential
losses
and
may
not
continue
to
be
available
to
uson
acceptable
terms,
if
at
all.If we cannot enter into new clinical study collaborations, our product development and subsequent commercialization could be delayed.







In
the
past,
we
have
entered
into
clinical
study
collaborations,
and
our
success
in
the
future
depends
in
part
on
our
ability
to
enter
into
additionalcollaborations
with
highly
regarded
institutions.
This
can
be
difficult
due
to
internal
and
external
constraints
placed
on
these
organizations.
Some
organizationsmay
limit
the
number
of
collaborations
they
have
with
any
one
company
so
as
to
not
be
perceived
as
biased
or
conflicted.
Organizations
may
also
have
insufficientadministrative
and
related
infrastructure
to
enable
collaborations
with
many
companies
at
once,
which
can
extend
the
time
it
takes
to
develop,
negotiate
andimplement
a
collaboration.
Additionally,
organizations
often
insist
on
retaining
the
rights
to
publish
the
clinical
data
resulting
from
the
collaboration.
Thepublication
of
clinical
data
in
peer-reviewed
journals
is
a
crucial
step
in
commercializing
and
obtaining
reimbursement
for
our
diagnostic
tests,
and
our
inability
tocontrol
when
and
if
results
are
published
may
delay
or
limit
our
ability
to
derive
sufficient
revenue
from
them.If we use hazardous materials in a manner that causes contamination or injury, we could be liable for resulting damages.







We
are
subject
to
federal,
state
and
local
laws,
rules
and
regulations
governing
the
use,
discharge,
storage,
handling
and
disposal
of
biological
material,chemicals
and
waste.
We
cannot
eliminate
the
risk
of
accidental
contamination
or
injury
to
employees
or
third
parties
from
the
use,
storage,
handling
or
disposal
ofthese
materials.
In
the
event
of
contamination
or
injury,
we
could
be
held
liable
for
any
resulting
damages,
remediation
costs
and
any
related
penalties
or
fines,
andany
liability
could
exceed
our
resources
or
any
applicable
insurance
coverage
we
may
have.
The
cost
of
compliance
with
these
laws
and
regulations
may
becomesignificant,
and
our
failure
to
comply
may
result
in
substantial
fines
or
other
consequences,
and
either
could
negatively
affect
our
operating
results.Our inability to raise additional capital on acceptable terms in the future may limit our ability to develop and commercialize new solutions and technologiesand expand our operations.







We
expect
continued
capital
expenditures
and
operating
losses
over
the
next
several
years
as
we
expand
our
infrastructure,
commercial
operations
andresearch
and
development
activities.
We
may
seek
to
raise
additional
capital
through
equity
offerings,
debt
financings,
collaborations
or
licensing
arrangements.Additional
funding
may
not
be
available
to
us
on
acceptable
terms,
or
at
all.
If
we
raise
funds
by
issuing
equity
securities,
dilution
to
our
stockholders
could
result.Any
equity
securities
issued
also
may
provide
for
rights,
preferences
or
privileges
senior
to
those
of
holders
of
our
common
stock.
The53Table
of
Contentsterms
of
debt
securities
issued
or
borrowings
could
impose
significant
restrictions
on
our
operations.
The
incurrence
of
additional
indebtedness
or
the
issuance
ofcertain
equity
securities
could
result
in
increased
fixed
payment
obligations
and
could
also
result
in
restrictive
covenants,
such
as
limitations
on
our
ability
to
incuradditional
debt
or
issue
additional
equity,
limitations
on
our
ability
to
acquire
or
license
intellectual
property
rights,
and
other
operating
restrictions
that
couldadversely
affect
our
ability
to
conduct
our
business.
In
addition,
the
issuance
of
additional
equity
securities
by
us,
or
the
possibility
of
such
issuance,
may
cause
themarket
price
of
our
common
stock
to
decline.
In
the
event
that
we
enter
into
collaborations
or
licensing
arrangements
to
raise
capital,
we
may
be
required
to
acceptunfavorable
terms.
These
agreements
may
require
that
we
relinquish
or
license
to
a
third-party
on
unfavorable
terms
our
rights
to
technologies
or
productcandidates
that
we
otherwise
would
seek
to
develop
or
commercialize
ourselves,
or
reserve
certain
opportunities
for
future
potential
arrangements
when
we
mightbe
able
to
achieve
more
favorable
terms.
If
we
are
not
able
to
secure
additional
funding
when
needed,
we
may
have
to
delay,
reduce
the
scope
of
or
eliminate
oneor
more
research
and
development
programs
or
selling
and
marketing
initiatives.
In
addition,
we
may
have
to
work
with
a
partner
on
one
or
more
of
our
productsor
development
programs,
which
could
lower
the
economic
value
of
those
programs
to
our
company.Security breaches, loss of data and other disruptions to us or our third-party service providers could compromise sensitive information related to our businessor prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.







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







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







In
addition,
the
interpretation
and
application
of
consumer,
health-related
and
data
protection
laws
in
the
United
States,
Europe
and
elsewhere
are
oftenuncertain,
contradictory
and
in
flux.
It
is
possible
that
these
laws
may
be
interpreted
and
applied
in
a
manner
that
is
inconsistent
with
our
practices.
If
so,
this
couldresult
in
government-imposed
fines
or
orders
requiring
that
we
change
our
practices,
which
could
adversely
affect
our
business.
In
addition,
in
October
2015,
theEuropean
Court
of
Justice
invalidated
a
safe-harbor
agreement
between
the
United
States
and
European
Union
member-states,
which
addressed
how
U.S.companies
handle
personal
information
of
European
customers,
as
a
result,
we
may
need
to54Table
of
Contentsmodify
the
way
we
treat
such
information.
Complying
with
these
various
laws
could
cause
us
to
incur
substantial
costs
or
require
us
to
change
our
businesspractices,
systems
and
compliance
procedures
in
a
manner
adverse
to
our
business.If we cannot license rights to use technologies on reasonable terms, we may not be able to commercialize new products in the future.







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







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







We
apply
for
and
in-license
patents
covering
our
products
and
technologies
and
uses
thereof,
as
we
deem
appropriate,
however
we
may
fail
to
apply
forpatents
on
important
products
and
technologies
in
a
timely
fashion
or
at
all,
or
we
may
fail
to
apply
for
patents
in
potentially
relevant
jurisdictions.
We
have
eightissued
patents
that
expire
between
2029
and
2032
related
to
methods
used
in
the
Afirma
diagnostic
platform,
in
addition
to
eight
pending
U.S.
utility
patentapplications
and
six
U.S.
provisional
applications.
Some
of
these
U.S.
utility
patent
applications
have
pending
foreign
counterparts.
We
also
exclusively
licensedintellectual
property,
including
rights
to
two
issued
patents
that
will
expire
between
2030
and
2032,
and
three
pending
U.S.
utility
patent
applications
in
the
thyroidspace
that
would
expire
between
2030
and
2033
once
issued,
related
to
methods
that
are
used
in
the
Afirma
diagnostic
test,
some
of
which
have
foreigncounterparts.
In
the
lung
diagnostic
space,
we
exclusively
license
intellectual
property
rights
to
seven
pending
patent
applications
and
one
issued
patent
in
theUnited
States
and
abroad.
Patents
issuing
from
the
licensed
portfolio
will
expire
between
2024
and
2028.
In
addition,
we
own
a
PCT
application
and
a
pendingU.S.
application
related
to
our
Percepta
test.
We
also
own
two
applications
related
to
other
lung
diseases,
and
a
PCT
application,
a
pending
U.S.
application,
andtwo
ex-U.S.
applications
related
to
our
interstitial
lung
disease
test
under
development.
Any
patents
granted
from
the
current
lung
cancer
patent
applications
willexpire
no
earlier
than
2035
and
those
from
the
interstitial
lung
disease
patent
applications
will
expire
no
earlier
than
from
2034
to
2035.
It
is
possible
that
none
ofour
pending
patent
applications
will
result
in
issued
patents
in
a
timely
fashion
or
at
all,
and
even
if
patents
are
granted,
they
may
not
provide
a
basis
forintellectual
property
protection
of
commercially
viable
products,
may
not
provide
us
with
any
competitive
advantages,
or
may
be
challenged
and
invalidated
bythird
parties.
It
is
possible
that
others
will
design
around
our
current
or
future
patented
technologies.
We
may
not
be
successful
in
defending
any
challenges
madeagainst
our
patents
or
patent
applications.
Any
successful
third-party
challenge
to
our
patents
could
result
in
the
unenforceability
or
invalidity
of
such
patents
andincreased
competition
to
our
business.
The
outcome
of
patent
litigation
can
be
uncertain
and
any
attempt
by
us
to
enforce
our
patent
rights
against
others
may
notbe
successful,
or,
if
successful,
may
take
substantial
time
and
result
in
substantial
cost,
and
may
divert
our
efforts
and
attention
from
other
aspects
of
our
business.55Table
of
Contents







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







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







The
laws
of
some
foreign
countries
do
not
protect
intellectual
property
rights
to
the
same
extent
as
the
laws
of
the
United
States,
and
we
may
encounterdifficulties
protecting
and
defending
such
rights
in
foreign
jurisdictions.
The
legal
systems
of
many
other
countries
do
not
favor
the
enforcement
of
patents
andother
intellectual
property
protection,
particularly
those
relating
to
biotechnology,
which
could
make
it
difficult
for
us
to
stop
the
infringement
of
our
patents
insuch
countries.
Proceedings
to
enforce
our
patent
rights
in
foreign
jurisdictions
could
result
in
substantial
cost
and
divert
our
efforts
and
attention
from
otheraspects
of
our
business.







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







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







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







We
may
also
be
subject
to
claims
that
our
employees
have
inadvertently
or
otherwise
used
or
disclosed
trade
secrets
or
other
proprietary
information
of
theirformer
employers,
or
to
claims
that
we
have
improperly
used
or
obtained
such
trade
secrets.
Litigation
may
be
necessary
to
defend
against
these
claims.
If
we
failin
defending
such
claims,
in
addition
to
paying
monetary
damages,
we
may
lose
valuable
intellectual
property
rights
and
face
increased
competition
to
ourbusiness.
A
loss
of
key
research
personnel
work
product
could
hamper
or
prevent
our
ability
to
commercialize
potential
products,
which
could
harm
our
business.Even
if
we
are
successful
in
defending
against
these
claims,
litigation
could
result
in
substantial
costs
and
be
a
distraction
to
management.56Table
of
Contents







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







We
have
not
registered
certain
of
our
trademarks
in
all
of
our
potential
markets.
If
we
apply
to
register
these
trademarks,
our
applications
may
not
be
allowedfor
registration
in
a
timely
fashion
or
at
all,
and
our
registered
trademarks
may
not
be
maintained
or
enforced.
In
addition,
opposition
or
cancellation
proceedingsmay
be
filed
against
our
trademark
applications
and
registrations,
and
our
trademarks
may
not
survive
such
proceedings.
If
we
do
not
secure
registrations
for
ourtrademarks,
we
may
encounter
more
difficulty
in
enforcing
them
against
third
parties
than
we
otherwise
would.







To
the
extent
our
intellectual
property
offers
inadequate
protection,
or
is
found
to
be
invalid
or
unenforceable,
we
would
be
exposed
to
a
greater
risk
of
directcompetition.
If
our
intellectual
property
does
not
provide
adequate
coverage
of
our
competitors'
products,
our
competitive
position
could
be
adversely
affected,
ascould
our
business.
Both
the
patent
application
process
and
the
process
of
managing
patent
disputes
can
be
time
consuming
and
expensive.We may be involved in litigation related to intellectual property, which could be time-intensive and costly and may adversely affect our business, operatingresults or financial condition.







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







We
might
not
have
been
the
first
to
make
the
inventions
covered
by
each
of
our
pending
patent
applications
and
we
might
not
have
been
the
first
to
file
patentapplications
for
these
inventions.
To
determine
the
priority
of
these
inventions,
we
may
have
to
participate
in
interference
proceedings,
derivation
proceedings,
orother
post-grant
proceedings
declared
by
the
U.S.
Patent
and
Trademark
Office
that
could
result
in
substantial
cost
to
us.
No
assurance
can
be
given
that
otherpatent
applications
will
not
have
priority
over
our
patent
applications.
In
addition,
recent
changes
to
the
patent
laws
of
the
United
States
allow
for
various
post-grant
opposition
proceedings
that
have
not
been
extensively
tested,
and
their
outcome
is
therefore
uncertain.
Furthermore,
if
third
parties
bring
these
proceedingsagainst
our
patents,
we
could
experience
significant
costs
and
management
distraction.







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







As
we
move
into
new
markets
and
applications
for
our
products,
incumbent
participants
in
such
markets
may
assert
their
patents
and
other
proprietary
rightsagainst
us
as
a
means
of
slowing
our
entry
into
such
markets
or
as
a
means
to
extract
substantial
license
and
royalty
payments
from
us.
Our57Table
of
Contentscompetitors
and
others
may
now
and,
in
the
future,
have
significantly
larger
and
more
mature
patent
portfolios
than
we
currently
have.
In
addition,
future
litigationmay
involve
patent
holding
companies
or
other
adverse
patent
owners
who
have
no
relevant
product
revenue
and
against
whom
our
own
patents
may
provide
littleor
no
deterrence
or
protection.
Therefore,
our
commercial
success
may
depend
in
part
on
our
non-infringement
of
the
patents
or
proprietary
rights
of
third
parties.Numerous
significant
intellectual
property
issues
have
been
litigated,
and
will
likely
continue
to
be
litigated,
between
existing
and
new
participants
in
our
existingand
targeted
markets
and
competitors
may
assert
that
our
products
infringe
their
intellectual
property
rights
as
part
of
a
business
strategy
to
impede
our
successfulentry
into
or
growth
in
those
markets.
Third
parties
may
assert
that
we
are
employing
their
proprietary
technology
without
authorization.
In
addition,
ourcompetitors
and
others
may
have
patents
or
may
in
the
future
obtain
patents
and
claim
that
making,
having
made,
using,
selling,
offering
to
sell
or
importing
ourproducts
infringes
these
patents.
We
could
incur
substantial
costs
and
divert
the
attention
of
our
management
and
technical
personnel
in
defending
against
any
ofthese
claims.
Parties
making
claims
against
us
may
be
able
to
obtain
injunctive
or
other
relief,
which
could
block
our
ability
to
develop,
commercialize
and
sellproducts,
and
could
result
in
the
award
of
substantial
damages
against
us.
In
the
event
of
a
successful
claim
of
infringement
against
us,
we
may
be
required
to
paydamages
and
ongoing
royalties,
and
obtain
one
or
more
licenses
from
third
parties,
or
be
prohibited
from
selling
certain
products.
We
may
not
be
able
to
obtainthese
licenses
on
acceptable
terms,
if
at
all.
We
could
incur
substantial
costs
related
to
royalty
payments
for
licenses
obtained
from
third
parties,
which
couldnegatively
affect
our
financial
results.
In
addition,
we
could
encounter
delays
in
product
introductions
while
we
attempt
to
develop
alternative
methods
or
productsto
avoid
infringing
third-party
patents
or
proprietary
rights.
Defense
of
any
lawsuit
or
failure
to
obtain
any
of
these
licenses
could
prevent
us
from
commercializingproducts,
and
the
prohibition
of
sale
of
any
of
our
products
could
materially
affect
our
business
and
our
ability
to
gain
market
acceptance
for
our
products.







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.
In
addition,
during
the
course
of
this
kind
of
litigation,
there
could
bepublic
announcements
of
the
results
of
hearings,
motions
or
other
interim
proceedings
or
developments.
If
securities
analysts
or
investors
perceive
these
results
tobe
negative,
it
could
have
a
substantial
adverse
effect
on
the
price
of
our
common
stock.







In
addition,
our
agreements
with
some
of
our
customers,
suppliers
or
other
entities
with
whom
we
do
business
require
us
to
defend
or
indemnify
these
partiesto
the
extent
they
become
involved
in
infringement
claims,
including
the
types
of
claims
described
above.
We
could
also
voluntarily
agree
to
defend
or
indemnifythird
parties
in
instances
where
we
are
not
obligated
to
do
so
if
we
determine
it
would
be
important
to
our
business
relationships.
If
we
are
required
or
agree
todefend
or
indemnify
third
parties
in
connection
with
any
infringement
claims,
we
could
incur
significant
costs
and
expenses
that
could
adversely
affect
ourbusiness,
operating
results,
or
financial
condition.Risks
Related
to
Being
a
Public
CompanyWe will continue to incur increased costs and demands on management as a result of compliance with laws and regulations applicable to public companies,which could harm our operating results.







As
a
public
company,
we
will
continue
to
incur
significant
legal,
accounting,
consulting
and
other
expenses
that
we
did
not
incur
as
a
private
company,including
costs
associated
with
public
company
reporting
requirements.
In
addition,
the
Sarbanes-Oxley
Act
of
2002
and
the
Dodd-Frank
Act
of
2010,
as
well
asrules
implemented
by
the
Securities
and
Exchange
Commission,
or
the
SEC,
and
The
NASDAQ
Stock
Market,
impose
a
number
of
requirements
on
publiccompanies,
including
with
respect
to
corporate
governance
practices.
Our
management
and
other
personnel
will
need
to
devote
a
substantial
amount
of
time
tothese
compliance
and
disclosure
obligations.
Moreover,
these
rules
and
regulations
have
and
will
continue
to
increase
our
legal,
accounting
and
financialcompliance
costs
and
make
some
activities
more58Table
of
Contentscomplex,
time-consuming
and
costly.
We
also
expect
that
it
will
continue
to
be
expensive
for
us
to
maintain
director
and
officer
liability
insurance.If we are unable to implement and maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completenessof our reported financial information and the market price of our common stock may be negatively affected.







As
a
public
company,
we
are
required
to
maintain
internal
control
over
financial
reporting
and
to
report
any
material
weaknesses
in
such
internal
control.Section
404
of
the
Sarbanes-Oxley
Act
of
2002
requires
that
we
evaluate
and
determine
the
effectiveness
of
our
internal
control
over
financial
reporting
and,beginning
with
the
annual
report
for
the
year
ending
December
31,
2014,
provide
a
management
report
on
our
internal
controls
on
an
annual
basis.
If
we
havematerial
weaknesses
in
our
internal
control
over
financial
reporting,
we
may
not
detect
errors
on
a
timely
basis
and
our
financial
statements
may
be
materiallymisstated.
We
have
only
recently
compiled
the
systems,
processes
and
documentation
necessary
to
comply
with
Section
404
of
the
Sarbanes-Oxley
Act.
We
willneed
to
maintain
and
enhance
these
processes
and
controls
as
we
grow,
and
we
will
require
additional
management
and
staff
resources
to
do
so.
Additionally,
evenif
we
conclude
our
internal
controls
are
effective
for
a
given
period,
we
may
in
the
future
identify
one
or
more
material
weaknesses
in
our
internal
controls,
inwhich
case
our
management
will
be
unable
to
conclude
that
our
internal
control
over
financial
reporting
is
effective.
Moreover,
when
we
are
no
longer
an
emerginggrowth
company,
our
independent
registered
public
accounting
firm
will
be
required
to
issue
an
attestation
report
on
the
effectiveness
of
our
internal
control
overfinancial
reporting.
Even
if
our
management
concludes
that
our
internal
control
over
financial
reporting
is
effective,
our
independent
registered
public
accountingfirm
may
conclude
that
there
are
material
weaknesses
with
respect
to
our
internal
controls
or
the
level
at
which
our
internal
controls
are
documented,
designed,implemented
or
reviewed.







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







We
are
an
emerging
growth
company,
as
defined
under
the
Securities
Act
of
1933,
or
the
Securities
Act.
We
will
remain
an
emerging
growth
company
untilDecember
31,
2018,
although
if
our
revenue
exceeds
$1
billion
in
any
fiscal
year
before
that
time,
we
would
cease
to
be
an
emerging
growth
company
as
of
the
endof
that
fiscal
year.
In
addition,
if
the
market
value
of
our
common
stock
that
is
held
by
non-affiliates
exceeds
$700
million
as
of
the
last
business
day
of
our
secondfiscal
quarter
of
any
fiscal
year
before
the
end
of
that
five-year
period,
we
would
cease
to
be
an
emerging
growth
company
as
of
December
31
of
that
year.
As
anemerging
growth
company,
we
may
choose
to
take
advantage
of
exemptions
from
various
reporting
requirements
applicable
to
certain
other
public
companies,including
not
being
required
to
comply
with
the
auditor
attestation
requirements
of
Section
404
of
the
Sarbanes-Oxley
Act
of
2002,
reduced
financial
statement
andfinancial-related
disclosures,
reduced
disclosure
obligations
regarding
executive
compensation
in
our
periodic
reports
and
proxy
statements,
and
exemptions
fromthe
requirement
of
holding
a
nonbinding
advisory
vote
on
executive
compensation
and
obtaining
stockholder
approval
of
any
golden
parachute
payments
notpreviously
approved
by
our
stockholders.
If
some
investors
find
our
common
stock
less
attractive
as
a
result
of
any
choices
to
reduce59Table
of
Contentsfuture
disclosure
we
may
make,
there
may
be
a
less
active
trading
market
for
our
common
stock
and
our
stock
price
may
be
more
volatile.Risks
Related
to
Our
Common
StockOur stock price may be volatile, and you may not be able to sell shares of our common stock at or above the price you paid.







Prior
to
our
initial
public
offering
in
October
2013,
there
was
no
public
market
for
our
common
stock,
and
an
active
and
liquid
public
market
for
our
stockmay
not
develop
or
be
sustained.
In
addition,
the
trading
price
of
our
common
stock
is
likely
to
continue
to
be
highly
volatile
and
could
be
subject
to
widefluctuations
in
response
to
various
factors,
some
of
which
are
beyond
our
control.
These
factors
include:•actual
or
anticipated
variations
in
our
and
our
competitors'
results
of
operations;
•announcements
by
us
or
our
competitors
of
new
products,
commercial
relationships
or
capital
commitments;
•changes
in
reimbursement
by
current
or
potential
payers;
•issuance
of
new
securities
analysts'
reports
or
changed
recommendations
for
our
stock;
•fluctuations
in
our
revenue,
due
in
part
to
the
way
in
which
we
recognize
revenue;
•actual
or
anticipated
changes
in
regulatory
oversight
of
our
products;
•developments
or
disputes
concerning
our
intellectual
property
or
other
proprietary
rights;
•commencement
of,
or
our
involvement
in,
litigation;
•announced
or
completed
acquisitions
of
businesses
or
technologies
by
us
or
our
competitors;
•any
major
change
in
our
management;
and
•general
economic
conditions
and
slow
or
negative
growth
of
our
markets.







In
addition,
the
stock
market
in
general,
and
the
market
for
stock
of
life
sciences
companies
and
other
emerging
growth
companies
in
particular,
hasexperienced
extreme
price
and
volume
fluctuations
that
have
often
been
unrelated
or
disproportionate
to
the
operating
performance
of
those
companies.
Broadmarket
and
industry
factors
may
seriously
affect
the
market
price
of
our
common
stock,
regardless
of
our
actual
operating
performance.
These
fluctuations
may
beeven
more
pronounced
if
the
trading
volume
of
our
stock
remains
low.
In
addition,
in
the
past,
following
periods
of
volatility
in
the
overall
market
and
the
marketprice
of
a
particular
company's
securities,
securities
class
action
litigation
has
often
been
instituted
against
these
companies.
This
litigation,
if
instituted
against
us,could
result
in
substantial
costs
and
a
diversion
of
our
management's
attention
and
resources.If securities or industry analysts issue an adverse opinion regarding our stock or do not publish research or reports about our company, our stock price andtrading 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
and
our
business.
Wedo
not
control
these
analysts
or
the
content
and
opinions
or
financial
models
included
in
their
reports.
Securities
analysts
may
elect
not
to
provide
researchcoverage
of
our
company,
and
such
lack
of
research
coverage
may
adversely
affect
the
market
price
of
our
common
stock.
The
price
of
our
common
stock
couldalso
decline
if
one
or
more
equity
research
analysts
downgrade
our
common
stock
or
if
those
analysts
issue
other
unfavorable
commentary
or
cease
publishingreports
about
us
or
our
business.
If
one
or
more
equity
research
analysts
cease
coverage
of
our
company,
we
could
lose
visibility
in
the
market,
which
in
turn
couldcause
our
stock
price
to
decline.60Table
of
ContentsInsiders have substantial control over us and will be able to influence corporate matters.







As
of
March
4,
2016,
directors
and
executive
officers
and
their
affiliates
beneficially
owned,
in
the
aggregate,
42%
of
our
outstanding
capital
stock.
As
aresult,
these
stockholders
will
be
able
to
exercise
significant
influence
over
all
matters
requiring
stockholder
approval,
including
the
election
of
directors
andapproval
of
significant
corporate
transactions,
such
as
a
merger
or
other
sale
of
our
company
or
its
assets.
This
concentration
of
ownership
could
limit
stockholders'ability
to
influence
corporate
matters
and
may
have
the
effect
of
delaying
or
preventing
a
third-party
from
acquiring
control
over
us.Anti-takeover provisions in our charter documents and under Delaware law could discourage, delay or prevent a change in control and may affect the tradingprice of our common stock.







Provisions
in
our
restated
certificate
of
incorporation
and
our
amended
and
restated
bylaws
may
have
the
effect
of
delaying
or
preventing
a
change
of
controlor
changes
in
our
management.
Our
restated
certificate
of
incorporation
and
amended
and
restated
bylaws
include
provisions
that:•authorize
our
board
of
directors
to
issue,
without
further
action
by
the
stockholders,
up
to
5.0
million
shares
of
undesignated
preferred
stock;
•require
that
any
action
to
be
taken
by
our
stockholders
be
effected
at
a
duly
called
annual
or
special
meeting
and
not
by
written
consent;
•specify
that
special
meetings
of
our
stockholders
can
be
called
only
by
our
board
of
directors,
our
chairman
of
the
board,
or
our
chief
executiveofficer;
•establish
an
advance
notice
procedure
for
stockholder
approvals
to
be
brought
before
an
annual
meeting
of
our
stockholders,
including
proposednominations
of
persons
for
election
to
our
board
of
directors;
•establish
that
our
board
of
directors
is
divided
into
three
classes,
Class
I,
Class
II
and
Class
III,
with
each
class
serving
staggered
terms;
•provide
that
our
directors
may
be
removed
only
for
cause;
•provide
that
vacancies
on
our
board
of
directors
may,
except
as
otherwise
required
by
law,
be
filled
only
by
a
majority
of
directors
then
in
office,even
if
less
than
a
quorum;
•specify
that
no
stockholder
is
permitted
to
cumulate
votes
at
any
election
of
directors;
and
•require
a
super-majority
of
votes
to
amend
certain
of
the
above-mentioned
provisions.







In
addition,
we
are
subject
to
the
provisions
of
Section
203
of
the
Delaware
General
Corporation
Law
regulating
corporate
takeovers.
Section
203
generallyprohibits
us
from
engaging
in
a
business
combination
with
an
interested
stockholder
subject
to
certain
exceptions.We have never paid dividends on our capital stock, and we do not anticipate paying dividends in the foreseeable future.







We
have
never
paid
dividends
on
any
of
our
capital
stock
and
currently
intend
to
retain
any
future
earnings
to
fund
the
growth
of
our
business.
In
addition,
ourloan
and
security
agreement
restricts
our
ability
to
pay
cash
dividends
on
our
common
stock
and
we
may
also
enter
into
credit
agreements
or
other
borrowingarrangements
in
the
future
that
will
restrict
our
ability
to
declare
or
pay
cash
dividends
on
our
common
stock.
Any
determination
to
pay
dividends
in
the
future
willbe
at
the
discretion
of
our
board
of
directors
and
will
depend
on
our
financial
condition,
operating
results,
capital
requirements,
general
business
conditions
andother
factors
that
our
board
of
directors
may
deem
relevant.
As
a
result,
capital
appreciation,
if
any,
of
our
common
stock
will
be
the
sole
source
of
gain
for
theforeseeable
future.61Table
of
ContentsITEM
1B.



UNRESOLVED
STAFF
COMMENTS








None.ITEM
2.



PROPERTIES








On
April
29,
2015,
we
signed
a
non-cancelable
lease
agreement
for
approximately
59,000
square
feet
to
serve
as
our
new
South
San
Francisco,
Californiaheadquarters
and
laboratory.
The
lease
began
in
June
2015
and
ends
in
March
2026,
and
contains
extension
of
lease
term
and
expansion
options.
We
also
lease24,000
square
feet
of
office
and
laboratory
space
in
South
San
Francisco
under
a
lease
that
expires
in
March
2016
and
approximately
10,400
square
feet
of
officeand
laboratory
space
in
Austin,
Texas,
under
a
lease
that
expires
in
July
2018,
with
an
option
for
us
to
extend
the
lease
for
an
additional
five
years.ITEM
3.



LEGAL
PROCEEDINGS








We
are
not
currently
a
party
to
any
material
legal
proceedings.
We
may
from
time
to
time
become
involved
in
legal
proceedings
arising
in
the
ordinary
courseof
business.ITEM
4.



MINE
SAFETY
DISCLOSURE








Not
applicable.EXECUTIVE
OFFICERS
OF
THE
REGISTRANT







Our
executive
officers
and
their
ages
and
positions
as
of
March
4,
2016,
are
as
set
forth
below:








Bonnie H. Anderson has
served
as
our
Chief
Executive
Officer
and
as
a
member
of
our
board
of
directors
since
February
2008.
In
August
2013,
she
wasappointed
as
our
President.
Prior
to
joining
us,
Ms.
Anderson
was
an
independent
strategic
consultant
from
April
2006
to
January
2008,
including
as
a
strategicconsultant
for
us
from
July
2007
to
January
2008.
Ms.
Anderson
was
a
Vice
President
at
Beckman
Coulter,
Inc.,
a
manufacturer
of
biomedical
testing
instrumentsystems,
tests
and
supplies,
from
September
2000
to
March
2006.
She
currently
serves
as
a
trustee
emeritus
of
the
Keck
Graduate
Institute
of
Applied
LifeSciences.
Ms.
Anderson
holds
a
B.S.
in
Medical
Technology
from
Indiana
University
of
Pennsylvania.








Julie A. Brooks has
served
as
our
General
Counsel
and
Secretary
since
March
2014.
Prior
to
joining
us,
Ms.
Brooks
was
a
legal
consultant
for
Auxogyn,
Inc.,a
women's
health
company,
from
September
2013
to
December
2013.
From
June
2013
to
September
2013,
Ms.
Brooks
served
as
Vice
President,
General
Counselfor
Bayer
HealthCare
LLC,
which
acquired
Conceptus,
Inc.,
a
medical
device
company,
in
June
2013,
where
she
served
as
Executive
Vice
President,
GeneralCounsel
and
Secretary
from
November
2009
through
June
2013.
Previously,
from
November
2007
through
October
2009,
Ms.
Brooks
was
Senior
Vice
President,General
Counsel
and
Secretary
of
Perlegen
Sciences,
a
genomics
company.
Ms.
Brooks
has
also
held
executive
roles
with
a
number
of
medical
device,
healthcareIT,
eCommerce
and
healthcare
services
companies,
including
Virgin
HealthCare,
Access
Health
and
Westmark
International.
Ms.
Brooks
holds
a
B.A.
inComparative
Literature
and
an
M.B.A.
from
the
University
of
Washington,
a
J.D.
from
Santa
Clara
University
and
a
Masters
of
Law
in
Taxation
from
GeorgetownUniversity
Law
Center.








Shelly D. Guyer has
served
as
our
Chief
Financial
Officer
since
April
2013
and
served
as
our
Secretary
from
April
2013
to
March
2014.
Prior
to
joining
us,Ms.
Guyer
served
as
Chief
Financial
Officer
and
Executive
Vice
President
of
Finance
and
Administration
of
iRhythm
Technologies,
Inc.,
a
medical
device62Name
Age
PositionBonnie
H.
Anderson

58
President,
Chief
Executive
Officer
and
DirectorJulie
A.
Brooks

70
General
Counsel
and
SecretaryShelly
D.
Guyer

55
Chief
Financial
OfficerChristopher
M.
Hall

47
Chief
Operating
OfficerTable
of
Contentsand
service
company,
from
April
2008
to
December
2012.
From
March
2006
to
August
2007,
Ms.
Guyer
served
as
Vice
President
of
Business
Development
andInvestor
Relations
of
Nuvelo
Inc.,
a
biopharmaceutical
company.
Prior
to
joining
Nuvelo,
Ms.
Guyer
worked
at
J.P.
Morgan
Securities
and
its
predecessorcompanies
for
over
17
years,
serving
in
a
variety
of
roles
including
in
healthcare
investment
banking.
Ms.
Guyer
holds
an
A.B.
in
Politics
from
PrincetonUniversity
and
an
M.B.A.
from
the
Haas
School
of
Business
at
the
University
of
California,
Berkeley.








Christopher M. Hall has
served
as
our
Chief
Operating
Officer
since
September
2014.
Mr.
Hall
served
as
our
Chief
Commercial
Officer
from
March
2010
toSeptember
2014.
Prior
to
joining
us,
Mr.
Hall
served
as
Chief
Business
Officer
of
Celera
Corporation,
a
diagnostics
company
focusing
on
personalized
diseasemanagement,
from
October
2008
to
February
2010.
From
August
2002
to
February
2010,
Mr.
Hall
served
in
various
executive
and
senior
positions
at
BerkeleyHeartLab,
Inc.,
a
cardiovascular
disease
management
company
that
was
acquired
by
Celera
in
October
2007,
including
Chief
Clinical
Operations
Officer
and
VicePresident
of
Marketing.
Mr.
Hall
holds
a
B.A.
in
Economics
and
Political
Science
from
DePauw
University
and
an
M.B.A.
from
Harvard
Business
School.63Table
of
ContentsPART
II
ITEM
5.



MARKET
FOR
REGISTRANT'S
COMMON
EQUITY,
RELATED
STOCKHOLDER
MATTERS
AND
ISSUER
PURCHASES
OF
EQUITYSECURITIES
Market
Information







Our
common
stock
commenced
trading
under
the
symbol
"VCYT"
on
The
NASDAQ
Global
Market
under
the
symbol
"VCYT"
on
October
30,
2013.
Prior
tothat
time,
there
was
no
public
market
for
our
common
stock.
The
following
table
sets
forth
the
high
and
low
sales
prices
of
our
common
stock,
on
a
per
share
basis,as
reported
by
The
NASDAQ
Global
Market,
for
the
periods
indicated:







As
of
March
4,
2016,
there
were
approximately
24
holders
of
record
of
our
common
stock.
However,
because
many
of
our
outstanding
shares
are
held
inaccounts
with
brokers
and
other
institutions,
we
have
more
beneficial
owners.Dividend
Policy







We
have
never
declared
or
paid
dividends
on
our
common
stock
and
do
not
expect
to
pay
dividends
on
our
common
stock
for
the
foreseeable
future.
Instead,we
anticipate
that
all
of
our
earnings
in
the
foreseeable
future
will
be
used
for
the
operation
and
growth
of
our
business.
Any
future
determination
to
declaredividends
will
be
subject
to
the
discretion
of
our
board
of
directors
and
will
depend
on
various
factors,
including
applicable
laws,
our
results
of
operations,financial
condition,
future
prospects,
and
any
other
factors
deemed
relevant
by
our
board
of
directors.
In
addition,
the
terms
of
our
loan
and
security
agreementrestricts
our
ability
to
pay
dividends
on
our
common
stock,
and
we
may
also
enter
into
credit
agreements
or
other
borrowing
arrangements
in
the
future
that
willfurther
restrict
our
ability
to
declare
or
pay
dividends
on
our
common
stock.Stock
Performance
Graph







The
following
information
is
not
deemed
to
be
"soliciting
material"
or
to
be
"filed"
with
the
Securities
and
Exchange
Commission
or
subject
toRegulation
14A
or
14C
under
the
Securities
Exchange
Act
of
1934
or
to
the
liabilities
of
Section
18
of
the
Securities
Exchange
Act
of
1934,
and
will
not
bedeemed
to
be
incorporated
by
reference
into
any
filing
under
the
Securities
Act
of
1933
or
the
Securities
Exchange
Act
of
1934,
except
to
the
extent
we
specificallyincorporate
it
by
reference
into
such
a
filing.







The
graph
below
shows
the
cumulative
total
stockholder
return
(change
in
stock
price
plus
reinvested
dividends)
assuming
the
investment
of
$100.00
on
thedate
specified
in
each
of
our
common
stock,
The
NASDAQ
Global
Market
Index,
and
the
NASDAQ
Biotechnology
Index
for
the
period
commencing
onOctober
30,
2013
(the
first
day
of
trading
of
our
common
stock)
and
ending
on
December
31,
2015.
The64


High
Low
2015






Fourth
Quarter
$8.15
$4.69
Third
Quarter
$12.47
$4.59
Second
Quarter
$12.20
$7.24
First
Quarter
$9.74
$6.50
2014






Fourth
Quarter
$9.85
$6.01
Third
Quarter
$17.92
$9.22
Second
Quarter
$18.01
$12.24
First
Quarter
$19.00
$13.76
Table
of
Contentscomparisons
in
the
table
are
required
by
the
Securities
and
Exchange
Commission
and
are
not
intended
to
forecast
or
be
indicative
of
future
performance
of
ourcommon
stock.

Sales
of
Unregistered
Securities







In
April
2015,
we
completed
a
private
placement
of
4,907,975
shares
of
our
common
stock
to
certain
accredited
investors,
or
Investors,
at
a
purchase
price
of$8.15
per
share.
Gross
proceeds
to
us
were
$40.0
million
and
we
received
$37.3
million
in
net
proceeds,
after
deducting
placement
agent
fees
and
other
expensespayable
by
us
of
$2.7
million.
The
shares
of
common
stock
issued
in
the
private
placement
were
sold
in
reliance
on
the
exemption
from
registration
provided
bySection
4(a)(2)
of
the
Securities
Act
of
1933.
We
relied
on
this
exemption
from
registration
based
in
part
on
representations
made
by
the
investors.65


October
30,
2013
December
31,
2013
March
31,
2014
June
30,
2014
September
30,
2014
Veracyte,
Inc.

$100.00
$109.00
$129.00
$129.00
$74.00
NASDAQ
Global
Market
Index
$100.00
$107.00
$107.00
$112.00
$115.00
NASDAQ
Biotechnology
Index
$100.00
$111.00
$115.00
$125.00
$133.00



December
31,
2014
March
31,
2015
June
30,
2015
September
30,
2015
December
31,
2015
Veracyte,
Inc.

$73.00
$55.00
$84.00
$35.00
$54.00
NASDAQ
Global
Market
Index
$121.00
$125.00
$127.00
$118.00
$128.00
NASDAQ
Biotechnology
Index
$148.00
$229.00
$180.00
$148.00
$165.00
Table
of
ContentsEquity
Compensation
Plan
Information







Information
pertaining
to
our
equity
compensation
plans
is
set
forth
in
Item
12.
Security
Ownership
of
Certain
Beneficial
Owners
and
Management
andRelated
Stockholder
Matters—Equity
Compensation
Plan
Information,
and
is
incorporated
herein
by
reference.ITEM
6.



SELECTED
FINANCIAL
DATA








The
information
set
forth
below
should
be
read
in
conjunction
with
"Item
7.
Management's
Discussion
and
Analysis
of
Financial
Condition
and
Results
ofOperations"
and
our
audited
financial
statements
and
related
notes
included
elsewhere
in
this
annual
report.
The
selected
balance
sheet
data
at
December
31,
2015and
2014
and
the
selected
statements
of
operations
data
for
each
of
the
years
ended
December
31,
2015,
2014
and
2013
have
been
derived
from
our
auditedfinancial
statements
that
are
included
elsewhere
in
this
report.
The
selected
balance
sheet
data
at
December
31,
2013,
2012
and
2011
and
the
selected
statements
ofoperations
data
for
the
years
end
December
31,
2012
and
2011
have
been
derived
from
our
audited
financial
statements
not
included
in
this
report.
The
financialdata
included
in66Table
of
Contentsthis
report
are
historical
and
are
not
necessarily
indicative
of
results
to
be
expected
in
any
future
period
(in
thousands
of
dollars,
except
share
and
per
share
dataand
FNAs
received):Balance
Sheets
Data:67


Year
Ended
December
31,



2015
2014
2013
2012
2011
Statements
of
Operations
Data:















Revenue
$49,503
$38,190
$21,884
$11,628
$2,645
Operating
expenses:















Cost
of
revenue(1)

21,497

16,606

12,607

7,584

2,925
Research
and
development(1)

12,796

9,804

7,810

6,608

6,680
Selling
and
marketing(1)

25,293

21,932

12,540

8,447

2,934
General
and
administrative(1)

22,583

18,854

12,100

7,918

5,372
Intangible
asset
amortization

800

—

—

—

—
Total
operating
expenses(1)

82,969

67,196

45,057

30,557

17,911
Loss
from
operations

(33,466)
(29,006)
(23,173)
(18,929)
(15,266)Interest
expense

(378)
(439)
(233)
—

—
Other
income
(expense),
net

140

72

(2,174)
280

821
Net
loss
$(33,704)$(29,373)$(25,580)$(18,649)$(14,445)Net
loss
per
common
share,
basic
and
diluted
$(1.30)$(1.36)$(6.15)$(28.68)$(24.90)Shares
used
in
computing
net
loss
per
commonshare,
basic
and
diluted

25,994,193

21,639,374

4,158,664

650,333

580,061
Other
Operating
Data:















FNAs
received

78,548

65,848

49,670

25,890

6,402
(1)Includes
employee
stock-based
compensation
as
follows:


Year
Ended
December
31,



2015
2014
2013
2012
2011
Cost
of
revenue
$100
$51
$34
$26
$32
Research
and
development

1,178

790

250

131

130
Selling
and
marketing

1,326

707

169

111

77
General
and
administrative

2,998

2,000

794

407

227
Total
stock-based
compensation
$5,602
$3,548
$1,247
$675
$466



As
of
December
31,



2015
2014
2013
2012
2011
Cash
and
cash
equivalents
$39,084
$35,014
$71,220
$14,002
$7,566
Working
capital

33,211

26,203

61,019

7,390

6,707
Total
assets

75,285

64,839

79,630

19,067

10,451
Convertible
preferred
stock

—

—

—

63,372

49,296
Accumulated
deficit

(148,726)
(115,022)
(85,649)
(60,069)
(41,420)Total
stockholders'
equity
(deficit)

51,252

41,374

56,443

(58,471)
(40,766)Table
of
ContentsITEM
7.



MANAGEMENT'S
DISCUSSION
AND
ANALYSIS
OF
FINANCIAL
CONDITION
AND
RESULTS
OF
OPERATIONS









The following discussion and analysis of financial condition and results of operations should be read together with the financial statements and the relatednotes included in Item 8 of Part II of this Annual Report on Form 10-K. This discussion and analysis contains certain forward-looking statements that involve risksand uncertainties. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but arenot limited to, those identified below and those set forth under the section entitled "Risk Factors" in Item 1A, and other documents we file with the Securities andExchange Commission. Historical results are not necessarily indicative of future results.Overview







We
are
a
molecular
diagnostics
company
that
focuses
on
genomic
solutions
that
resolve
diagnostic
ambiguity,
thus
enabling
physicians
to
make
moreinformed
treatment
decisions
at
an
early
stage
in
patient
care.
By
improving
preoperative
diagnostic
accuracy,
we
aim
to
help
patients
avoid
unnecessary
invasiveprocedures
while
reducing
healthcare
costs.
Our
first
commercial
solution,
the
Afirma
Thyroid
FNA
Analysis,
or
Afirma,
centers
on
the
proprietary
Afirma
GeneExpression
Classifier,
or
GEC,
which
is
becoming
a
new
standard
of
care
in
thyroid
nodule
assessment.
The
Afirma
GEC
helps
physicians
reduce
the
number
ofunnecessary
surgeries
by
approximately
50%
by
employing
a
proprietary
142-gene
signature
to
preoperatively
identify
benign
thyroid
nodules
among
thosedeemed
indeterminate
by
cytopathology
alone.
An
additional
25
genes
are
used
to
differentiate
uncommon
neoplasm
subtypes.
We
have
demonstrated
the
clinicalutility
and
cost
effectiveness
of
the
Afirma
GEC
in
multiple
studies
published
in
peer-reviewed
journals
and
established
the
test's
clinical
validity
in
a
studypublished
in
The New England Journal of Medicine in
2012.
The
comprehensive
Afirma
offering
also
includes
cytopathology
testing
and
the
Afirma
MalignancyClassifiers,
launched
in
May
2014.
Since
we
commercially
launched
Afirma
in
January
2011
through
December
31,
2015,
we
have
received
over
225,000
fineneedle
aspiration,
or
FNA,
samples
for
evaluation
using
Afirma
and
performed
over
50,000
GECs
to
resolve
indeterminate
cytopathology
results.







In
April
2015,
we
accelerated
our
entry
into
pulmonology,
our
second
clinical
area,
with
the
launch
of
the
Percepta
Bronchial
Genomic
Classifier,
which
weobtained
through
our
acquisition
of
Allegro
Diagnostics
Corp.,
or
Allegro,
in
September
2014.
The
Percepta
test
is
designed
to
improve
the
preoperative
diagnosisof
lung
cancer,
thus
helping
to
reduce
unnecessary
invasive,
risky
and
costly
procedures
in
patients
with
suspicious
lung
nodules
and
lesions
that
were
initiallyfound
on
CT
scans.
Clinical
validation
data
from
two
multicenter,
prospective
studies—AEGIS
I
and
II—were
published
in
July
2015
in
The New England Journalof Medicine .
Our
initial
focus
is
on
building
our
library
of
clinical
evidence,
including
clinical
utility,
for
the
Percepta
classifier,
while
we
work
to
secure
coveragefor
the
test
from
Medicare
and
private
payers.
As
of
March
2016,
we
have
expanded
to
40
the
number
of
thought-leading
academic
and
other
institutions
aroundthe
country
that
are
now
offering
Percepta
to
their
patients
during
this
initial
stage
of
commercialization.







Our
second
pulmonology
product,
which
we
plan
to
introduce
in
the
fourth
quarter
of
2016,
is
designed
to
to
preoperatively
identify
idiopathic
pulmonaryfibrosis,
or
IPF,
among
patients
presenting
with
a
suspected
interstitial
lung
disease,
or
ILD.







We
have
an
Amended
and
Restated
U.S.
Co-Promotion
Agreement,
or
Amended
Agreement,
with
Genzyme
to
market
the
Afirma
test
in
the
United
States.On
March
9,
2016,
we
formalized
the
decision
to
conclude
the
Amended
Agreement
with
Genzyme
effective
September
9,
2016.
In
February
2015,
we
enteredinto
an
Ex-U.S.
Co-Promotion
Agreement,
or
Ex-U.S.
Agreement,
with
Genzyme
for
the
promotion
of
the
Afirma
GEC
test
with
exclusivity
in
five
countriesoutside
the
United
States
initially
and
in
other
countries
agreed
to
from
time
to
time.
The
agreement
commenced
on
January
1,
2015
and
continues
untilDecember
31,
2019,
with
extension
of
the
agreement
possible
upon
agreement
of
the68Table
of
Contentsparties.
Country-specific
terms
have
been
established
under
this
agreement
for
Brazil
and
Singapore
and
a
right
of
first
negotiation
has
been
established
forCanada,
the
Netherlands
and
Italy.







We
increased
the
list
price
billed
for
the
GEC
from
$4,875
to
$6,400
per
test
in
July
2015,
while
the
list
price
billed
for
routine
cytopathology
remained
at$490
per
test.
We
obtained
Medicare
coverage
for
the
GEC
effective
in
January
2012
and
contracted
reimbursement
at
an
agreed
upon
rate
of
$3,200.
We
haveentered
into
contracts
establishing
in-network
allowable
rates
for
both
our
GEC
and
cytopathology
tests
with
payers
including
United
Healthcare,
Aetna
and
Cigna,as
well
as
several
Blue
Cross
Blue
Shield
plans,
among
others.
We
have
also
received
positive
coverage
determinations
from
numerous
other
commercial
payersand,
as
of
March
2016,
the
GEC
is
covered
by
payers
representing
nearly
180
million
lives.
We
now
have
nearly
130
million
lives
under
contract.
Payers
that
haveagreed
to
pay
for
Afirma
under
contract
are
also
counted
as
covered
lives.
Contracted
and
reimbursement
rates
vary
by
payer.







On
March
1,
2015,
a
separate
CPT
code,
or
Current
Procedural
Terminology
code,
for
the
Afirma
GEC
was
issued,
which
we
believe
will
continue
tofacilitate
our
progress
with
payer
coverage
and
contracts,
and
reimbursement.
The
new
code
became
effective
January
1,
2016.
In
November
2015,
the
Centers
forMedicare
&
Medicaid
Services,
or
CMS,
issued
a
final
determination
for
the
2016
Clinical
Lab
Fee
Schedule,
or
CLFS,
to
establish
a
national
limitation
amountfor
this
new
CPT
code
under
the
gapfill
process
through
the
regional
MACs
during
calendar
year
2016.







We
recognized
revenue
of
$49.5
million,
$38.2
million
and
$21.9
million
in
the
years
ended
December
31,
2015,
2014
and
2013,
respectively.
Revenueincreased
by
30%,
75%
and
88%
for
the
years
ended
December
31,
2015,
2014
and
2013,
respectively
over
the
respective
prior
year.
We
incurred
a
net
loss
of$33.7
million,
$29.4
million
and
$25.6
million
for
the
years
ended
December
31,
2015,
2014
and
2013,
respectively.
As
of
December
31,
2015,
we
had
anaccumulated
deficit
of
$148.7
million.Factors
Affecting
Our
PerformanceThe Number of FNAs We Receive and Test







The
growth
in
our
business
is
tied
to
the
number
of
FNAs
we
receive
and
the
number
of
GECs
performed.
Approximately
87%
of
FNAs
we
receive
are
for
theAfirma
solution,
which
consists
of
services
related
to
rendering
a
cytopathology
diagnosis,
and
if
the
cytopathology
result
is
indeterminate,
the
GEC
is
performed.The
remaining
approximate
13%
of
FNAs
are
received
from
customers
performing
cytopathology
and
when
the
cytopathology
result
is
indeterminate,
the
FNA
issent
to
us
for
the
GEC
only.
The
rate
at
which
adoption
occurs
in
these
two
settings
will
cause
these
two
percentages
to
fluctuate
over
time.
Less
than
1%
of
theFNA
samples
we
receive
for
cytopathology
have
insufficient
cellular
material
from
which
to
render
a
cytopathology
diagnosis.
We
only
bill
the
technicalcomponent,
including
slide
preparation,
for
these
tests.
For
results
that
are
benign
or
suspicious/malignant
by
cytopathology,
we
bill
for
these
services
when
weissue
the
report
to
the
physician.
If
the
cytopathology
result
is
indeterminate,
defined
as
atypia/follicular
lesions
of
undetermined
significance
(AUS/FLUS)
orsuspicious
for
FN/HCN,
we
perform
the
GEC.
Historically,
approximately
14%-17%
of
samples
we
have
received
for
the
Afirma
solution
have
yieldedindeterminate
results
by
cytopathology.
Approximately
5%-10%
of
the
samples
for
GEC
testing
have
insufficient
ribonucleic
acid,
or
RNA,
from
which
to
render
aresult.
The
GEC
can
be
reported
as
Benign,
Suspicious
or
No
Result.
We
bill
for
the
GEC
Benign
and
GEC
Suspicious
results
only.
After
the
GEC
is
completed,we
issue
the
cytopathology
report
for
the
indeterminate
results
as
well
as
the
GEC
report,
and
then
bill
for
both
of
these
tests.
We
incur
costs
of
collecting
andshipping
the
FNAs
and
a
portion
of
the
costs
of
performing
tests
where
we
cannot
ultimately
issue
a
patient
report.
Because
we
cannot
bill
for
all
samples
received,the
number
of
FNAs
received
does
not
directly
correlate
to
the
total
number
of
patient
reports
issued
and
the
amount
billed.69Table
of
ContentsContinued Adoption of and Reimbursement for Afirma







To
date,
only
a
small
number
of
payers
have
reimbursed
us
for
Afirma
at
full
list
price.
Revenue
growth
depends
on
both
our
ability
to
achieve
broaderreimbursement
at
increased
levels
from
third-party
payers
and
to
expand
our
base
of
prescribing
physicians
and
increase
our
penetration
in
existing
accounts.Because
some
payers
consider
the
GEC
experimental
and
investigational,
we
may
not
receive
payment
for
tests
and
payments
we
receive
may
not
be
at
acceptablelevels.
We
expect
our
revenue
growth
will
increase
as
more
payers
make
a
positive
coverage
decision
and
as
payers
enter
into
contracts
with
us,
which
shouldenhance
our
accrued
revenue
and
cash
collections.
To
drive
increased
adoption
of
Afirma,
we
increased
our
internal
sales
force
in
high-volume
geographiesdomestically
in
2014
and
2015
and
plan
to
do
so
again
in
2016,
along
with
increasing
our
marketing
efforts.
We
have
also
hired
institutional
channel
managers
tofocus
on
the
institutional
segment,
which
accounts
generally
send
us
only
GECs.
If
we
are
unable
to
expand
the
base
of
prescribing
physicians
and
penetrationwithin
these
accounts
at
an
acceptable
rate,
or
if
we
are
not
able
to
execute
our
strategy
for
increasing
reimbursement,
we
may
not
be
able
to
effectively
increaseour
revenue.







Our
average
reimbursement
per
GEC
was
approximately
$2,200
for
the
quarter
ended
December
31,
2015
as
compared
with
approximately
$2,200
for
thesame
period
in
2014.
The
average
quarterly
reimbursement
ranged
from
$2,200
to
$2,300
in
2015
as
compared
to
a
range
of
$1,900
to
$2,200
in
2014.
The
averageGEC
reimbursement
rate
will
change
over
time
due
to
a
number
of
factors,
including
medical
coverage
decisions
by
payers,
the
effects
of
contracts
signed
withpayers,
changes
in
allowed
amounts
by
payers,
our
ability
to
successfully
win
appeals
for
payment,
and
our
ability
to
collect
cash
payments
from
third-party
payersand
individual
patients.
Historical
average
reimbursement
is
not
necessarily
indicative
of
future
average
reimbursement.







We
calculate
the
average
GEC
reimbursement
from
all
payers,
whether
they
are
on
a
cash
or
an
accrual
basis,
for
tests
that
are
on
average
a
year
old,
since
itcan
take
a
significant
period
of
time
to
collect
from
some
payers.
We
use
an
average
of
reimbursement
for
tests
provided
over
two
quarters
as
it
reduces
the
effectsof
temporary
volatility
and
seasonal
effects.
Thus
the
average
reimbursement
per
GEC
represents
the
total
cash
collected
to
date
against
GEC
tests
performedduring
the
relevant
period
divided
by
the
number
of
GEC
tests
performed
during
that
same
period.How We Recognize Revenue







A
significant
portion
of
our
revenue
is
recognized
upon
the
earlier
of
receipt
of
third-party
notification
of
payment
or
when
cash
is
received.
For
Medicare
andcertain
other
payers
where
we
have
an
agreed
upon
reimbursement
rate
or
we
are
able
to
make
a
reasonable
estimate
of
reimbursement
at
the
time
delivery
iscomplete,
we
recognize
the
related
revenue
on
an
accrual
basis.
In
the
first
period
in
which
revenue
is
accrued
for
a
particular
payer,
there
generally
is
a
one-timeincrease
in
revenue.
Until
we
have
contracts
with
or
can
estimate
the
amount
that
will
ultimately
be
received
from
a
larger
number
of
payers,
we
will
recognize
alarge
portion
of
our
revenue
upon
the
earlier
of
notification
of
payment
or
when
cash
is
received.
Additionally,
as
we
commercialize
new
products,
we
will
need
tobe
able
to
make
an
estimate
of
the
amount
that
will
ultimately
be
received
from
each
payer
for
each
new
product
offering
prior
to
being
able
to
recognize
therelated
revenue
on
an
accrual
basis.
Because
the
timing
and
amount
of
cash
payments
received
from
payers
is
difficult
to
predict,
we
expect
that
our
revenue
willfluctuate
significantly
in
any
given
quarter.
In
addition,
even
if
we
begin
to
accrue
larger
amounts
of
revenue
related
to
Afirma,
when
we
introduce
new
products,we
do
not
expect
we
will
be
able
to
recognize
revenue
from
new
products
on
an
accrual
basis
for
some
period
of
time.
This
may
result
in
continued
fluctuations
inour
revenue.







As
of
December
31,
2015,
cumulative
amounts
billed
at
list
price
for
tests
processed
which
were
not
recognized
as
revenue
upon
delivery
of
a
patient
reportbecause
our
accrual
revenue
recognition
criteria
were
not
met
and
for
which
we
have
not
received
notification
of
payment,
collected
cash
or
written
off
asuncollectible,
totaled
approximately
$134
million.70Table
of
Contents







As
of
December
31,
2014,
cumulative
amounts
billed
at
list
price
for
tests
processed
which
were
not
recognized
as
revenue
upon
delivery
of
a
patient
reportbecause
our
accrual
revenue
recognition
criteria
were
not
met
and
for
which
we
have
not
received
notification
of
payment,
collected
cash
or
written
off
asuncollectible,
totaled
$86
million.
Of
this
amount,
we
recognized
revenue
of
approximately
$9
million
in
the
year
ended
December
31,
2015,
when
cash
wasreceived.







Generally,
cash
we
receive
is
collected
within
12
months
of
the
date
the
test
is
billed.
We
cannot
provide
any
assurance
as
to
when,
if
ever,
or
to
what
extentany
of
these
amounts
will
be
collected.
Notwithstanding
our
efforts
to
obtain
payment
for
these
tests,
payers
may
deny
our
claims,
in
whole
or
in
part,
and
we
maynever
receive
revenue
from
previously
performed
but
unpaid
tests.
Revenue
from
these
tests,
if
any,
may
not
be
equal
to
the
billed
amount
due
to
a
number
offactors,
including
differences
in
reimbursement
rates,
the
amounts
of
patient
co-payments
and
co-insurance,
the
existence
of
secondary
payers
and
claims
denials.Finally,
when
we
increase
our
list
price,
as
we
did
in
July
2015,
it
will
increase
the
cumulative
amounts
billed.







We
incur
expense
for
tests
in
the
period
in
which
the
test
is
conducted
and
recognize
revenue
for
tests
in
the
period
in
which
our
revenue
recognition
criteriaare
met.
Accordingly,
any
revenue
that
we
recognize
as
a
result
of
cash
collection
in
respect
of
previously
performed
but
unpaid
tests
will
favorably
impact
ourliquidity
and
results
of
operations
in
future
periods.Impact of Genzyme Co-promotion Agreement







The
$10.0
million
up-front
co-promotion
fee
we
received
from
Genzyme
under
the
Co-Promotion
Agreement
dated
as
of
January
18,
2012
is
being
amortizedover
the
estimated
useful
life
based
on
the
provisions
of
the
agreement
as
a
reduction
to
selling
and
marketing
expenses.
We
amortized
$1.9
million,
$2.3
millionand
$2.5
million
of
the
$10.0
million
in
the
years
ended
December
31,
2015,
2014
and
2013,
respectively.
The
agreement
requires
that
we
pay
a
certain
percentageof
our
cash
receipts
from
the
sale
of
the
Afirma
GEC
test
to
Genzyme,
which
percentage
decreased
over
time.
The
percentage
was
40%
from
January
2013
throughFebruary
2014,
32%
from
February
2014
through
December
2014,
and
decreased
to
15%
in
January
2015.
Our
co-promotion
fees,
excluding
the
amortization
ofthe
up-front
co-promotion
fee,
were
$7.3
million,
$12.0
million
and
$8.6
million
in
the
years
ended
December
31,
2015,
2014
and
2013,
respectively,
and
areincluded
in
selling
and
marketing
expenses
in
our
statements
of
operations
and
comprehensive
loss.







In
November
2014,
we
signed
the
Amended
Agreement
with
Genzyme.
Under
the
Amended
Agreement,
the
co-promotion
fees
Genzyme
will
receive
as
apercentage
of
U.S.
cash
receipts
from
the
sale
of
the
Afirma
GEC
test
were
reduced
from
32%
to
15%
beginning
January
1,
2015.
Either
party
may
terminate
theagreement
for
convenience
with
six
months
prior
notice,
however,
neither
party
can
terminate
the
agreement
for
convenience
prior
to
June
30,
2016.
On
March
9,2016,
we
formalized
the
decision
to
conclude
the
Amended
Agreement
with
Genzyme
effective
September
9,
2016.







Under
the
Ex-U.S.
Agreement,
or
Ex-U.S.
Agreement,
we
will
pay
Genzyme
25%
of
net
revenue
from
the
sale
of
the
Afirma
GEC
test
in
Brazil
andSingapore
over
a
five-year
period
commencing
January
1,
2015.
Beginning
in
the
fourth
year
of
the
agreement,
which
was
effective
in
February
2015,
if
weterminate
the
agreement
for
convenience,
we
may
be
required
to
pay
a
termination
fee
contingent
on
the
number
of
GEC
billable
results
generated.Development of Additional Products







We
currently
rely
on
sales
of
Afirma
to
generate
all
of
our
revenue.
In
May
2014,
we
commercially
launched
our
Afirma
Malignancy
Classifiers,
which
webelieve
enhances
our
Afirma
Thyroid
FNA
Analysis
as
a
comprehensive
way
to
manage
thyroid
nodule
patients
and
serve
our
current
base
of
prescribingphysicians.
We
are
also
pursuing
development
or
acquisition
of
products
for
additional
diseases
to
increase
and
diversify
our
revenue.
For
example,
in
September2014
we
acquired
Allegro
and
with
it,
the
Percepta71Table
of
ContentsBronchial
Genomic
Classifier,
a
molecular
diagnostic
lung
cancer
test
designed
to
help
physicians
determine
which
patients
with
lung
nodules
who
have
had
aninconclusive
bronchoscopy
result
are
at
low
risk
for
cancer
and
can
thus
be
safely
monitored
with
CT
scans,
rather
than
undergoing
invasive
procedures.
Welaunched
the
Percepta
test
in
April
2015.
Additionally,
we
are
pursuing
a
solution
for
interstitial
lung
disease
that
will
offer
an
alternative
to
surgery
by
developinga
genomic
signature
to
classify
samples
collected
through
less
invasive
bronchoscopy
techniques.
Accordingly,
we
expect
to
continue
to
invest
heavily
in
researchand
development
in
order
to
expand
the
capabilities
of
our
solutions
and
to
develop
additional
products.
Our
success
in
developing
or
acquiring
new
products
willbe
important
in
our
efforts
to
grow
our
business
by
expanding
the
potential
market
for
our
products
and
diversifying
our
sources
of
revenue.Timing of Our Research and Development Expenses







We
deploy
state-of-the-art
and
costly
genomic
technologies
in
our
biomarker
discovery
experiments,
and
our
spending
on
these
technologies
may
varysubstantially
from
quarter
to
quarter.
We
also
spend
a
significant
amount
to
secure
clinical
samples
that
can
be
used
in
discovery
and
product
development
as
wellas
clinical
validation
studies.
The
timing
of
these
research
and
development
activities
is
difficult
to
predict,
as
is
the
timing
of
sample
acquisitions.
If
a
substantialnumber
of
clinical
samples
are
acquired
in
a
given
quarter
or
if
a
high-cost
experiment
is
conducted
in
one
quarter
versus
the
next,
the
timing
of
these
expenses
canaffect
our
financial
results.
We
conduct
clinical
studies
to
validate
our
new
products
as
well
as
on-going
clinical
studies
to
further
the
published
evidence
to
supportour
commercialized
tests.
As
these
studies
are
initiated,
start-up
costs
for
each
site
can
be
significant
and
concentrated
in
a
specific
quarter.
Spending
on
researchand
development,
for
both
experiments
and
studies,
may
vary
significantly
by
quarter
depending
on
the
timing
of
these
various
expenses.Historical Seasonal Fluctuations in FNA Volume and Cash Collections







Our
business
is
subject
to
fluctuations
in
the
number
of
FNA
samples
received
for
both
cytopathology
and
GEC
testing
throughout
the
year
as
a
result
ofphysician
practices
being
closed
for
holidays
or
endocrinology
and
thyroid-related
industry
meetings
which
are
widely
attended
by
our
prescribing
physicians.
Likeother
companies
in
our
field,
vacations
by
physicians
and
patients
tend
to
negatively
affect
our
volumes
more
during
the
summer
months
and
during
the
end
ofyear
holidays
compared
to
other
times
of
the
year.
Additionally,
we
may
receive
fewer
FNAs
in
the
winter
months
due
to
severe
weather
if
patients
are
not
able
tovisit
their
doctor's
office.
Our
reimbursed
rates
and
cash
collections
are
also
subject
to
seasonality.
Medicare
normally
makes
adjustments
in
its
fee
schedules
at
thebeginning
of
the
year
which
may
affect
our
reimbursement.
Additionally,
some
plans
reset
their
deductibles
at
the
beginning
of
each
year
which
means
that
patientsearly
in
the
year
are
responsible
for
a
greater
portion
of
the
cost
of
our
tests,
and
we
have
lower
cash
collection
rates
from
individuals
than
from
third-party
payers.Later
in
the
year,
particularly
in
the
fourth
quarter,
we
experience
improved
payment
results
as
third-party
payers
tend
to
clear
pending
claims
toward
year
end.This
trend
historically
has
increased
our
cash
collections
in
the
fourth
quarter.
The
effects
of
these
seasonal
fluctuations
in
prior
periods
may
have
been
obscuredby
the
growth
of
our
business.Financial
OverviewRevenue







Through
December
31,
2015,
all
of
our
revenue
have
been
derived
from
the
sale
of
Afirma.
To
date,
Afirma
has
been
delivered
primarily
to
physicians
in
theUnited
States.
We
generally
invoice
third-party
payers
upon
delivery
of
a
patient
report
to
the
prescribing
physician.
As
such,
we
take
the
assignment
of
benefitsand
the
risk
of
cash
collection
from
the
third-party
payer
and
individual
patients.
Third-party72Table
of
Contentspayers
in
excess
of
10%
of
revenue
and
their
related
revenue
as
a
percentage
of
total
revenue
were
as
follows:







As
the
number
of
payers
reimbursing
for
Afirma
increases,
the
percentage
of
revenue
derived
from
Medicare
and
other
significant
third-party
payers
haschanged
and
will
continue
to
change
as
a
percentage
of
total
revenue.







For
tests
performed
where
we
have
an
agreed
upon
reimbursement
rate
or
we
can
estimate
the
amount
we
will
ultimately
receive
at
the
time
delivery
iscomplete,
such
as
in
the
case
of
Medicare
and
certain
other
payers,
we
recognize
the
related
revenue
upon
delivery
of
a
patient
report
to
the
prescribing
physicianbased
on
the
established
billing
rate
less
contractual
and
other
adjustments
to
arrive
at
the
amount
that
we
expect
to
ultimately
receive.
We
determine
the
amountwe
expect
to
ultimately
receive
based
on
a
per
payer,
per
contract
or
agreement
basis.
The
expected
amount
is
typically
lower
than,
if
applicable,
the
agreed
uponreimbursement
amount
due
to
several
factors,
such
as
the
amount
of
patient
co-payments,
the
existence
of
secondary
payers
and
claim
denials.
In
other
situations,where
we
cannot
estimate
the
amount
that
will
be
ultimately
received,
we
recognize
revenue
upon
the
earlier
of
receipt
of
third-party
payer
notification
of
paymentor
when
cash
is
received.
Incremental
accrued
revenue
as
a
result
of
additional
payers
meeting
our
revenue
recognition
criteria
for
the
years
ended
December
31,2015
and
2014
was
approximately
$0.7
million
and
$0.8
million,
respectively
and
was
insignificant
in
2013.
Upon
ultimate
collection,
the
amount
received
fromMedicare
and
commercial
payers
where
reimbursement
was
estimated
is
compared
to
previous
estimates
and
the
contractual
allowance
is
adjusted
accordingly.Our
ability
to
increase
our
revenue
will
depend
on
our
ability
to
penetrate
the
market,
obtain
positive
coverage
policies
from
additional
third-party
payers,
obtainreimbursement
and/or
enter
into
contracts
with
additional
third-party
payers,
and
increase
reimbursement
rates
for
tests
performed.
Finally,
should
we
recognizerevenue
from
payers
on
an
accrual
basis
and
later
determine
the
judgments
underlying
estimated
reimbursement
change,
our
financial
results
could
be
negativelyimpacted
in
future
quarters.Cost of Revenue







The
components
of
our
cost
of
revenue
are
materials
and
service
costs,
including
cytopathology
testing
services,
stock-based
compensation
expense,
directlabor
costs,
equipment
and
infrastructure
expenses
associated
with
testing
samples,
shipping
charges
to
transport
samples,
and
allocated
overhead
including
rent,information
technology,
equipment
depreciation
and
utilities.
Costs
associated
with
performing
tests
are
recorded
as
the
test
is
processed
regardless
of
whether
andwhen
revenue
is
recognized
with
respect
to
that
test.
As
a
result,
our
cost
of
revenue
as
a
percentage
of
revenue
may
vary
significantly
from
period
to
periodbecause
we
do
not
recognize
all
revenue
in
the
period
in
which
the
associated
costs
are
incurred.
We
expect
cost
of
revenue
in
absolute
dollars
to
increase
as
thenumber
of
tests
we
perform
increases
and
as
the
rent
allocated
to
the
laboratory
increases
based
on
the
expanded
square
footage
of
the
laboratory
in
our
newfacility.
However,
we
expect
that
the
cost
per
test
will
decrease
over
time
due
to
leveraging
fixed
costs,
efficiencies
we
may
gain
as
test
volume
increases
and
fromautomation,
process
efficiencies
and
other
cost
reductions.
As
we
introduce
new
tests,
initially
our
cost
of
revenue
will
be
high
and
will
increase
disproportionatelyour
aggregate
cost
of
revenue
until
we
achieve
efficiencies
in
processing
these
new
tests.73


Year
Ended
December
31,



2015
2014
2013
Medicare

26%
26%
32%United
Healthcare

14%
18%
18%Aetna

9%
11%
9%

49%
55%
59%Table
of
ContentsResearch and Development







Research
and
development
expenses
include
costs
incurred
to
develop
our
technology,
collect
clinical
samples
and
conduct
clinical
studies
to
develop
andsupport
our
products.
These
costs
consist
of
personnel
costs,
including
stock-based
compensation
expense,
prototype
materials,
laboratory
supplies,
consultingcosts,
costs
associated
with
setting
up
and
conducting
clinical
studies
at
domestic
and
international
sites,
and
allocated
overhead
including
rent,
informationtechnology,
equipment
depreciation
and
utilities.
We
expense
all
research
and
development
costs
in
the
periods
in
which
they
are
incurred.
We
expect
our
researchand
development
expenses
will
increase
in
future
periods
as
we
continue
to
invest
in
research
and
development
activities
related
to
developing
additional
productsand
evaluating
various
platforms.
We
expect
that
in
the
next
12
months,
the
increase
in
research
and
development
expenses
will
be
for
the
development
and
launchof
our
new
ILD
product
and
for
the
continued
development
and
support
of
the
Afirma
and
Percepta
tests.
Specifically,
we
plan
to:
increase
the
body
of
clinicalevidence
to
support
Afirma;
incur
research
and
development
expenses
associated
with
clinical
utility
studies
to
support
the
commercialization
of
Percepta;
andincur
expenses
associated
with
development,
analytical
verification
and
clinical
validation
studies
in
our
ILD
program.Selling and Marketing







Selling
and
marketing
expenses
consist
of
personnel
costs,
including
stock-based
compensation
expense,
direct
marketing
expenses,
consulting
costs,
andallocated
overhead
including
rent,
information
technology,
equipment
depreciation
and
utilities.
In
addition,
co-promotion
fees
paid
to
Genzyme,
net
ofamortization
of
the
up-front
fee
received,
are
included
in
selling
and
marketing
expenses.
In
November
2014,
we
amended
the
co-promotion
agreement
withGenzyme
and
our
personnel
and
marketing
costs
increased
as
we
took
on
more
sales
and
marketing
responsibilities
related
to
Afirma,
but
these
increases
are
offsetby
the
lower
rate
we
are
required
to
pay
Genzyme
under
the
Amended
Agreement
beginning
in
January
2015.
On
March
9,
2016,
we
formalized
the
decision
toconclude
the
Amended
Agreement
with
Genzyme
effective
September
9,
2016.
Consequently,
in
2016,
we
intend
to
further
expand
our
internal
sales
force
andmarketing
spending
as
we
transition
out
of
the
relationship.
These
costs
will
be
offset
by
the
elimination
of
the
co-promotion
fee,
beginning
in
mid-September2016.
In
2016,
we
also
expect
to
incur
increased
selling
and
marketing
expense
as
a
result
of
investments
in
our
lung
product
portfolio.
We
believe
total
selling
andmarketing
expenses
will
increase
in
2016.General and Administrative







General
and
administrative
expenses
include
those
from
executive,
finance
and
accounting,
human
resources,
legal,
billing
and
client
services,
and
quality
andregulatory
functions.
These
expenses
include
personnel
costs,
including
stock-based
compensation
expense,
audit
and
legal
expenses,
consulting
costs,
costsassociated
with
being
a
public
company,
and
allocated
overhead
including
rent,
information
technology,
equipment
depreciation
and
utilities.
The
year
endedDecember
31,
2014
also
includes
transaction
costs
related
to
the
acquisition
of
Allegro
in
September
2014,
including
charges
for
merger
related
severance
andbonuses.
We
expect
our
general
and
administration
expenses
will
increase
over
the
next
12
months
as
we
expand
our
billing
group
to
support
anticipated
increaseddemand
for
our
tests,
incur
increasing
expenses
related
to
the
documentation
of
our
internal
controls
in
connection
with
compliance
with
Section
404
of
theSarbanes-Oxley
Act
of
2002,
and
incur
greater
legal
costs
for
patent
prosecution
and
for
public
company
compliance
and
general
corporate
purposes.
Additionally,while
we
do
not
begin
to
make
rent
payments
for
our
new
South
San
Francisco
facility
until
April
2016,
in
accordance
with
generally
accepted
accountingprinciples,
the
rent
is
expensed
on
a
straight-line
basis
over
the
lease
period.
Prior
to
beginning
to
utilize
the
space,
this
rent
expense
is
being
charged
to
generaland
administrative
in
the
amount
of
approximately
$0.5
million
per
quarter.74Table
of
ContentsIntangible Asset Amortization







Intangible
asset
amortization
began
in
April
2015
when
we
launched
the
Percepta
test
and
as
a
result
reclassified
the
indefinite-lived
intangible
asset
to
afinite-lived
intangible
asset.
The
finite-lived
intangible
asset
with
a
cost
of
$16.0
million
is
being
amortized
over
15
years,
using
the
straight-line
method.Interest Expense







Interest
expense
is
attributable
to
our
borrowings
under
our
loan
and
security
agreement.Other Income (Expense), Net







Other
income
(expense),
net,
for
the
years
ended
December
31,
2015
and
2014
consists
primarily
of
sublease
rental
income
and
interest
income
received
frompayers
and
from
our
cash
equivalents.







Other
income
(expense),
net,
in
the
year
ended
December
31,
2013
also
included
the
change
in
the
fair
value
of
the
preferred
stock
liability
associated
withour
obligation
to
issue
additional
shares
of
Series
C
convertible
preferred
stock.
We
determined
that
the
liability
to
issue
additional
Series
C
convertible
preferredstock
at
a
future
date
was
a
freestanding
instrument
that
should
be
accounted
for
as
a
liability.
Accordingly,
we
recorded
a
liability
related
to
this
instrument
at
thetime
of
the
initial
close
in
November
2012,
and
we
re-measured
the
liability
at
each
reporting
period
with
the
corresponding
gain
or
loss
from
the
adjustmentrecorded
as
other
income
(expense),
net,
through
the
issuance
of
the
final
Series
C
tranche
in
June
2013,
at
which
time
the
preferred
stock
liability
wasextinguished.







In
addition,
other
income
(expense),
net,
in
the
year
ended
December
31,
2013
included
changes
in
value
of
the
preferred
stock
warrant
liability
issued
inconnection
with
our
draw-down
of
borrowings
under
the
loan
and
security
agreement
in
June
2013.
We
recorded
a
liability
related
to
this
warrant
and
re-measuredthe
liability
at
each
reporting
period
with
the
corresponding
gain
or
loss
from
the
adjustment
recorded
as
other
income
(expense),
net.
The
preferred
stock
warrantliability
was
converted
into
a
warrant
to
purchase
our
common
stock
upon
the
completion
of
our
initial
public
offering,
or
IPO,
in
November
2013.
This
warrantwas
exercised
through
a
cashless
exercise
in
March
2014.Critical
Accounting
Polices
and
Estimates







Our
management's
discussion
and
analysis
of
our
financial
condition
and
results
of
operations
is
based
on
our
audited
financial
statements,
which
have
beenprepared
in
accordance
with
United
States
generally
accepted
accounting
principles,
or
U.S.
GAAP.
The
preparation
of
the
financial
statements
requires
us
to
makeestimates
and
assumptions
that
affect
the
reported
amounts
of
assets
and
liabilities
and
the
disclosure
of
contingent
assets
and
liabilities
at
the
date
of
the
financialstatements,
as
well
as
the
reported
revenue
generated
and
expenses
incurred
during
the
reporting
periods.
Our
estimates
are
based
on
our
historical
experience
andon
various
other
factors
that
we
believe
are
reasonable
under
the
circumstances,
the
results
of
which
form
the
basis
for
making
judgments
about
the
carrying
valueof
assets
and
liabilities
that
are
not
readily
apparent
from
other
sources.
Actual
results
may
differ
from
these
estimates
under
different
assumptions
or
conditionsand
any
such
differences
may
be
material.
We
believe
that
the
accounting
policies
discussed
below
are
critical
to
understanding
our
historical
and
futureperformance,
as
these
policies
relate
to
the
more
significant
areas
involving
management's
judgments
and
estimates.Revenue Recognition







We
recognize
revenue
in
accordance
with
the
provisions
of
ASC
954-605,
Health Care Entities—Revenue Recognition .
Our
revenue
is
generated
from
theprovision
of
diagnostic
services
using
the
Afirma
solution
and
the
service
is
completed
upon
the
delivery
of
test
results
to
the
prescribing
physician,
at
which
timewe
bill
for
the
service.
We
recognize
revenue
related
to
billings
for
Medicare
and
commercial
payers
on
an
accrual
basis,
net
of
contractual
and
other
adjustments,when
amounts
that
will
ultimately
be75Table
of
Contentsrealized
can
be
estimated.
Contractual
and
other
adjustments
represent
the
difference
between
the
list
price
(the
billing
rate)
and
the
estimated
reimbursement
ratefor
each
payer.
Upon
ultimate
collection,
the
amount
received
from
Medicare
and
commercial
payers
where
reimbursement
was
estimated
is
compared
to
previousestimates
and,
if
necessary,
the
contractual
allowance
is
adjusted
accordingly.
Until
a
contract
has
been
negotiated
with
a
commercial
payer
or
governmentalprogram,
the
Afirma
solution
may
or
may
not
be
covered
by
these
entities'
existing
reimbursement
policies.
In
addition,
patients
do
not
enter
into
direct
agreementswith
us
that
commit
them
to
pay
any
portion
of
the
cost
of
the
tests
in
the
event
that
their
insurance
declines
to
reimburse
us.
In
the
absence
of
an
agreement
withthe
patient
or
other
clearly
enforceable
legal
right
to
demand
payment
from
the
patient,
the
related
revenue
is
only
recognized
upon
the
earlier
of
paymentnotification,
if
applicable,
or
cash
receipt.







The
estimates
of
amounts
that
will
ultimately
be
realized
requires
significant
judgment
by
management.
Some
patients
have
out-of-pocket
costs
for
amountsnot
covered
by
their
insurance
carrier,
and
we
may
bill
the
patient
directly
for
these
amounts
in
the
form
of
co-payments
and
co-insurance
in
accordance
with
theirinsurance
carrier
and
health
plans.
Some
payers
may
not
cover
our
GEC
as
ordered
by
the
prescribing
physician
under
their
reimbursement
policies.
We
pursuereimbursement
from
such
patients
on
a
case-by-case
basis.
In
the
absence
of
contracted
reimbursement
coverage
or
the
ability
to
estimate
the
amount
that
willultimately
be
realized
for
our
services,
revenue
is
recognized
upon
the
earlier
of
receipt
of
third-party
payer
notification
of
payment
or
when
cash
is
received.







We
use
judgment
in
determining
if
we
are
able
to
make
an
estimate
of
what
will
be
ultimately
realized.
We
also
use
judgment
in
estimating
the
amounts
weexpect
to
collect
by
payer.
Our
judgments
will
continue
to
evolve
in
the
future
as
we
continue
to
gain
payment
experience
with
third-party
payers
and
patients.Business Combination







We
account
for
acquisitions
using
the
acquisition
method
of
accounting
which
requires
the
recognition
of
tangible
and
identifiable
intangible
assets
acquiredand
liabilities
assumed
at
their
estimated
fair
values
as
of
the
business
combination
date.
We
allocate
any
excess
purchase
price
over
the
estimated
fair
valueassigned
to
the
net
tangible
and
identifiable
intangible
assets
acquired
and
liabilities
assumed
to
goodwill.
Transaction
costs
are
expensed
as
incurred
in
generaland
administrative
expenses.
Results
of
operations
and
cash
flows
of
acquired
companies
are
included
in
our
operating
results
from
the
date
of
acquisition.Finite-lived Intangible Assets







Finite-lived
intangible
assets
relates
to
intangible
assets
reclassified
from
indefinite-lived
intangible
assets,
following
the
launch
of
Percepta
in
April
2015.We
amortize
finite-lived
intangible
assets
using
the
straight-line
method,
over
their
estimated
useful
life.
The
estimated
useful
life
of
15
years
was
used
for
theintangible
asset
related
to
Percepta
based
on
management's
estimate
of
product
life,
product
life
of
other
diagnostic
tests
and
patent
life.
We
test
this
finite-livedintangible
asset
for
impairment
when
events
or
circumstances
indicate
a
reduction
in
the
fair
value
below
its
carrying
amount.
There
was
no
impairment
for
theyears
ended
December
31,
2015
and
2014.Indefinite-lived Intangible Assets—In-process Research and Development







Our
indefinite-lived
intangible
assets
are
comprised
of
acquired
in-process
research
and
development,
or
("IPR&D").
The
fair
value
of
IPR&D
acquiredthrough
a
business
combination
is
capitalized
as
an
indefinite-lived
intangible
asset
until
the
completion
or
abandonment
of
the
related
research
and
developmentactivities.
When
research
and
development
is
complete,
the
associated
assets
are
amortized
on
a
straight-line
basis
over
their
estimated
useful
lives.
IPR&D
istested
for
impairment
annually
or
more
frequently
if
events
or
circumstances
indicate
that
the
fair
value
may
be
below
the
carrying
value
of
the
asset.
We
recognizean
impairment
loss
when
the
total
of
estimated
future
undiscounted
cash
flows76Table
of
Contentsexpected
to
result
from
the
use
of
the
asset
and
its
eventual
disposition
are
less
than
its
carrying
amount.
Impairment,
if
any,
would
be
assessed
using
discountedcash
flows
or
other
appropriate
measures
of
fair
value.
There
were
no
impairments
for
the
years
ended
December
31,
2015
and
2014.Derivative Liability







We
account
for
derivative
financial
instruments
as
either
equity
or
liabilities
based
upon
the
characteristics
and
provisions
of
each
instrument.
We
recordedthe
preferred
stock
liability
incurred
in
connection
with
our
Series
C
convertible
preferred
stock
and
the
preferred
stock
warrant
liability
related
to
the
issuance
of
awarrant
for
Series
C
convertible
preferred
stock,
each
as
a
derivative
financial
instrument
liability
at
their
fair
value
on
the
date
of
issuance,
and
we
re-measuredthem
on
each
subsequent
balance
sheet
date.
The
changes
in
fair
value
were
recognized
as
a
gain
or
loss
from
the
adjustment
to
other
income
(expense),
net,
in
thestatements
of
operations
and
comprehensive
loss.
We
estimated
the
fair
value
of
this
liability
using
option-pricing
models
that
include
assumptions
for
futurefinancings,
expected
volatility,
expected
life,
yield
and
risk-free
interest
rate.
The
preferred
stock
liability
was
extinguished
in
June
2013.
The
warrant
to
purchaseSeries
C
convertible
preferred
stock
was
converted
into
a
warrant
to
purchase
our
common
stock
as
of
the
closing
of
our
IPO
and
was
exercised
through
a
cashlessexercise
in
March
2014.Stock-based Compensation







We
recognize
stock-based
compensation
cost
for
only
those
shares
underlying
stock
options
that
we
expect
to
vest
on
a
straight-line
basis
over
the
requisiteservice
period
of
the
award.
We
estimate
the
fair
value
of
stock
options
using
a
Black-Scholes
option-pricing
model,
which
requires
the
input
of
highly
subjectiveassumptions,
including
the
option's
expected
term
and
stock
price
volatility.
In
addition,
judgment
is
also
required
in
estimating
the
number
of
stock-based
awardsthat
are
expected
to
be
forfeited.
Forfeitures
are
estimated
based
on
historical
experience
at
the
time
of
grant
and
revised,
if
necessary,
in
subsequent
periods
ifactual
forfeitures
differ
from
those
estimates.
The
assumptions
used
in
calculating
the
fair
value
of
share-based
payment
awards
represent
management's
bestestimates,
but
these
estimates
involve
inherent
uncertainties
and
the
application
of
management's
judgment.
As
a
result,
if
factors
change
and
we
use
differentassumptions,
our
stock-based
compensation
expense
could
be
materially
different
in
the
future.77Table
of
ContentsResults
of
OperationsComparison of the Years Ended December 31, 2015, 2014 and 2013 (in thousands of dollars, except percentages)Revenue







Revenue
increased
$11.3
million,
or
30%,
for
the
year
ended
December
31,
2015
compared
to
the
same
period
in
2014.
The
increase
was
primarily
due
toincreased
adoption
of
Afirma
and
the
resultant
increase
in
tests
delivered,
especially
the
proportion
of
GEC
tests
reported,
and,
to
a
lesser
extent,
additional
payersmeeting
our
revenue
recognition
criteria
for
accrual,
partially
offset
by
a
decrease
in
revenue
recorded
when
cash
is
received.
As
contracts
are
executed
and
asrevenue
and
cash
collection
becomes
more
predictable,
we
expect
to
continue
to
shift
to
accruing
for
revenue
instead
of
waiting
until
the
cash
is
received
torecognize
the
revenue.
Cash
revenue
for
the
year
December
31,
2015
was
positively
impacted
by
$0.5
million
of
catch-up
payments.







Revenue
increased
$16.3
million,
or
75%,
for
the
year
ended
December
31,
2014
compared
to
the
same
period
in
2013.
The
increase
was
primarily
due
torealizing
higher
reimbursement
rates
from
payers
as
well
as
from
increased
volume
due
to
increased
adoption
of
Afirma
and
increased
percentage
of
samples
forthe
GEC
test
only.
Cash
revenue
for
the
year
December
31,
2014
was
positively
impacted
by
$0.5
million
of
catch-up
payments.







Revenue
recognized
when
cash
is
received
and
on
an
accrual
basis
for
the
years
ended
December
31,
2015,
2014
and
2013
was
as
follows
(in
thousands
ofdollars):78


Year
Ended
December
31,



2015
Change
%
2014
Change
%
2013
Revenue
$49,503
$11,313

30%$38,190
$16,306

75%$21,884
Operating
expense:





















Cost
of
revenue

21,497

4,891

29%
16,606

3,999

32%
12,607
Research
and
development

12,796

2,992

31%
9,804

1,994

26%
7,810
Selling
and
marketing

25,293

3,361

15%
21,932

9,392

75%
12,540
General
and
administrative

22,583

3,729

20%
18,854

6,754

56%
12,100
Intangible
asset
amortization

800

800

—

—

—

—

—
Total
operating
expenses

82,969

15,773

23%
67,196

22,139

49%
45,057
Loss
from
operations

(33,466)
(4,460)
(15)%
(29,006)
(5,833)
(25)%
(23,173)Interest
expense

(378)
61

14%
(439)
(206)
(88)%
(233)Other
income
(expense),
net

140

68

94%
72

2,246

—

(2,174)Net
loss
and
comprehensive
loss
$(33,704)$(4,331)
(15)%$(29,373)$(3,793)
(15)%$(25,580)


Year
Ended
December
31,



2015
2014
2013
Revenue
recognized
when
cash
is
received
$22,460
$25,645
$14,586
Revenue
recognized
on
an
accrual
basis

27,043

12,545

7,298
Total
$49,503
$38,190
$21,884
Table
of
ContentsCost of revenue







Comparison
of
the
years
ended
December
31,
2015,
2014
and
2013
is
as
follows
(in
thousands
of
dollars,
except
percentages):







Cost
of
revenue
increased
$4.9
million,
or
29%,
for
the
year
ended
December
31,
2015
compared
to
the
same
period
in
2014.
Given
our
corporate
focus
onGEC
growth
and
the
adoption
of
the
Afirma
test,
GEC
tests
increased
by
38%
and
cytopathology
tests
increased
by
13%.
The
increase
in
reagents,
chips,consumables
and
related
costs
is
associated
primarily
with
increased
GEC
test
volume.
The
increase
in
cytopathology
fees
is
related
to
the
volume
increase
in
FNAsamples
processed.
The
increase
in
sample
collection
costs
is
primarily
related
to
increased
volume
of
samples.
The
increase
in
direct
labor
is
associated
with
theincrease
in
sample
volume
and
the
mix
shift
to
relatively
more
GECs
versus
cytopathology
tests
as
more
labor
hours
are
incurred
on
the
GEC
tests
compared
to
thecytopathology
tests
and
at
a
higher
average
employee
cost.
Other
costs
are
primarily
indirect
costs,
such
as
facilities
allocation,
depreciation
and
equipmentmaintenance,
which
increased
as
a
result
of
increased
allocable
costs
and
increased
allocation
to
cost
of
revenue
due
to
an
average
headcount
increase
of
34%.







Cost
of
revenue
increased
$4.0
million,
or
32%,
for
the
year
ended
December
31,
2014
compared
to
the
same
period
in
2013.
The
increase
was
primarily
dueto
an
increase
in
variable
costs
that
are
directly
related
to
the
increase
in
the
number
of
FNAs,
offset
in
part
by
continuing
refinements
in
our
testing
process
andeconomies
of
scale
related
to
the
increase
in
FNAs
samples
processed.
FNAs
received
increased
16,178,
or
33%,
to
65,848
in
the
year
ended
December
31,
2014.Research and development







Comparison
of
the
years
ended
December
31,
2015,
2014
and
2013
is
as
follows
(in
thousands
of
dollars,
except
percentages):







Research
and
development
expense
increased
$3.0
million,
or
31%,
for
the
year
ended
December
31,
2015
compared
to
the
same
period
in
2014.
The
increasein
personnel
related
expense
was
primarily
due
to
increased
accrued
bonuses
as
a
result
of
increased
bonus
targets
and
performance
as
well
as
an
18%
increase
inaverage
headcount
at
December
31,
2015
as
compared
to
the
same
period
in
2014.
The
increase
in
stock-based
compensation
expense
reflects
option
grants
to
newand
existing
employees.
The
increase
in79


Year
Ended
December
31,



2015
Change
%
2014
Change
%
2013
Cost
of
revenue:





















Reagents,
chips,
consumables
and
related
$7,508
$2,238

42%$5,271
$1,605

44%$3,666
Cytopathology
fees
and
related
costs

5,536

975

21%
4,561

846

23%
3,715
Sample
collecion

3,124

593

23%
2,531

479

23%
2,052
Direct
labor

2,528

719

40%
1,809

400

28%
1,409
Other

2,801

366

15%
2,434

669

38%
1,765
Total
$21,497
$4,891

29%$16,606
$3,999

32%$12,607



Year
Ended
December
31,



2015
Change
%
2014
Change
%
2013
Research
and
development
expense:





















Personnel
related
expense
$5,914
$1,380

30%$4,534
$659

17%$3,875
Stock-based
compensation
expense

1,178

388

49%
790

540

216%
250
Direct
R&D
expense

3,406

672

25%
2,734

1,049

62%
1,685
Other
expense

2,298

552

32%
1,746

(254)
(13)%
2,000
Total
$12,796
$2,992

31%$9,804
$1,994

26%$7,810
Table
of
Contentsdirect
R&D
expense
was
primarily
due
to
increased
clinical
expenses
associated
with
our
ongoing
thyroid
studies
and
the
Percepta
clinical
utility
study
andmaterials
purchased
for
research
and
development
experiments.
Other
expense
increased
primarily
as
a
result
of
consulting
and
increased
information
technologyand
facilities
expenses
that
were
related
to
research
and
development
activities.







Research
and
development
expense
increased
$2.0
million,
or
26%,
for
the
year
ended
December
31,
2014
compared
to
the
same
period
in
2013.
The
increasein
personnel
related
expense
was
primarily
due
to
a
38%
increase
in
headcount
at
December
31,
2014
as
compared
to
the
same
period
in
2013.
The
increase
instock-based
compensation
expense
reflects
option
grants
to
new
and
existing
employees.
The
increase
in
direct
R&D
expense
was
due
primarily
to
the
timing
ofgenome
sequencing
expenses
and
other
laboratory
expenses.
The
decrease
in
other
expense
was
due
primarily
to
$530,000
in
licensing
fees
to
secure
thyroidintellectual
property
in
2013,
partially
offset
by
an
increase
in
consulting
and
recruiting
fees.Selling and marketing







Comparison
of
the
years
ended
December
31,
2015,
2014
and
2013
is
as
follows
(in
thousands
of
dollars,
except
percentages):







Selling
and
marketing
expense
increased
$3.4
million,
or
15%,
for
the
year
ended
December
31,
2015
compared
to
the
same
period
in
2014.
The
decrease
inGenzyme
co-promotion
expense,
net,
reflects
a
reduction
in
the
co-promotion
percentage
rate
payable
to
Genzyme
in
2015
as
compared
to
2014,
partially
offset
bygrowth
in
cash
collections.
The
increase
in
personnel
related
expense
was
primarily
due
to
a
47%
increase
in
average
headcount
of
our
sales
and
marketing
team
atDecember
31,
2015
as
compared
to
the
same
period
in
2014,
as
well
as
increased
commissions
and
accrued
bonus
as
a
result
of
increased
performance
and
bonustargets.
The
increase
in
stock-based
compensation
expense
reflects
option
grants
to
new
and
existing
employees.
The
increase
in
direct
marketing
expense
was
dueprimarily
to
expenses
associated
with
Afirma,
including
trade
shows,
market
research,
advertising,
public
relations,
speaker
programs
and,
to
a
lesser
extent,
lung-related
marketing
expenses.
The
increase
in
other
expense
was
primarily
due
to
an
increase
in
consulting
expenses
and,
to
a
lesser
extent,
an
increase
ininformation
technology
and
facilities
expenses
that
were
related
to
sales
and
marketing
activities.







Selling
and
marketing
expense
increased
$9.4
million,
or
75%,
for
the
year
ended
December
31,
2014
compared
to
the
same
period
in
2013.
The
increase
inGenzyme
co-promotion
expense,
net,
reflects
growth
in
cash
collections,
partially
offset
by
a
reduction
in
the
co-promotion
percentage
rate
payable
to
Genzyme
in2014
as
compared
to
2013.
The
increase
in
personnel
related
expense
was
primarily
due
to
a
107%
increase
in
headcount
of
our
sales
force
at
December
31,
2014as
compared
to
the
same
period
in
2013.
The
increase
in
stock-based
compensation
expense
reflects
option
grants
to
new
and
existing
employees.
The
increase
indirect
marketing
expense
was
due
primarily
to
increased
marketing
and
promotional
materials
and
market
research
and
consultants.
The
increase
in
other
expensewas
primarily
due
to
an
increase
in
information
technology
and
facilities
expenses
that
were
related
to
sales
and
marketing
activities.80


Year
Ended
December
31,



2015
Change
%
2014
Change
%
2013
Selling
and
marketing
expense:





















Genzyme
co-promotion
expense,
net
$5,367
$(4,366)
(45)%$9,733
$3,649

60%$6,084
Personnel
related
expense

12,067

3,946

49%
8,121

3,830

89%
4,291
Stock-based
compensation
expense

1,326

619

88%
707

538

318%
169
Direct
marketing
expense

2,868

1,324

86%
1,544

562

57%
982
Other
expense

3,665

1,838

101%
1,827

813

80%
1,014
Total
$25,293
$3,361

15%$21,932
$9,392

75%$12,540
Table
of
ContentsGeneral and administrative







Comparison
of
the
years
ended
December
31,
2015,
2014
and
2013
is
as
follows
(in
thousands
of
dollars,
except
percentages):







General
and
administrative
expense
increased
$3.7
million,
or
20%,
for
the
year
ended
December
31,
2015
compared
to
the
same
period
in
2014.
The
increasein
personnel
related
expense
was
primarily
due
to
increased
accrued
bonuses
as
a
result
of
increased
bonus
targets
and
performance,
as
well
as
an
18%
increase
inaverage
headcount
at
December
31,
2015
as
compared
to
the
same
period
in
2014,
offset
by
bonus
and
severance
of
$1.2
million
associated
with
the
Allegroacquisition
in
2014.
The
increase
in
stock-based
compensation
expense
was
primarily
due
to
option
grants
to
new
and
existing
employees.
The
increase
inprofessional
fees
includes
higher
accounting,
audit,
legal
and
other
corporate
expenses
including
insurance,
offset
by
$0.5
million
of
professional
and
consultingfees
associated
with
the
Allegro
acquisition
in
2014.
The
increase
in
rent
and
other
facilities
expense
was
largely
due
to
incurring
expense
for
our
new
South
SanFrancisco
facility,
as
well
as
our
previous
space,
for
which
the
lease
ends
in
March
2016.
While
we
do
not
begin
to
make
rent
payments
for
our
new
South
SanFrancisco
facility
until
April
2016,
in
accordance
with
GAAP,
the
rent
is
expensed
on
a
straight-line
basis
over
the
lease
period.
Prior
to
utilizing
the
space,
thisrent
expense
was
being
charged
to
general
and
administrative
in
the
amount
of
approximately
$0.5
million
per
quarter.
The
increase
in
other
expense
was
dueprimarily
to
an
increase
in
consulting
expense
of
approximately
$0.5
million
and
other
expenses,
partially
offset
by
decreases
in
information
technology
andfacilities
costs
as
a
result
of
higher
allocations
to
other
functions
due
to
increased
average
headcount
in
other
functions.







General
and
administrative
expense
increased
$6.8
million,
or
56%,
for
the
year
ended
December
31,
2014
compared
to
the
same
period
in
2013.
The
increasein
personnel
related
expense
was
primarily
due
to
a
32%
increase
in
headcount
at
December
31,
2014
as
compared
to
the
same
period
in
2013
and
to
acquisitioncosts
of
$1.2
million
for
bonus
and
severance
paid
to
Allegro
employees.
The
increase
in
stock-based
compensation
expense
was
primarily
due
to
option
grants
tonew
and
existing
employees.
The
increase
in
professional
fees
includes
higher
audit,
legal
and
other
corporate
expenses
including
insurance,
associated
withoperating
as
a
public
company
for
the
full
year.
In
addition,
professional
fees
included
Allegro
acquisition
costs
of
approximately
$0.3
million
for
audit,
legal
andvaluation
services.
The
increase
in
other
expense
was
due
primarily
to
an
increase
in
consulting
expense
of
approximately
$0.9
million,
including
approximately$0.2
million
for
the
Allegro
acquisition.
Other
expense
also
included
fees
for
our
billing
system
and
postage
which
increased
as
a
result
of
increased
FNA
volume,and
tax/license
fees
which
increased
as
a
result
of
being
a
public
company.
These
other
expenses
were
largely
offset
by
decreases
in
computer
and
facilitiesallocations
as
a
result
of
increased
headcount
in
other
functions.Interest expense







Interest
expense
decreased
$61,000
for
the
year
ended
December
31,
2015
compared
to
the
same
period
in
2014
primarily
due
to
the
debt
modification
underour
amended
loan
and
security
agreement
entered
into
in
December
2014.
Interest
expense
increased
$206,000
for
the
year
ended
December
31,
201481


Year
Ended
December
31,



2015
Change
%
2014
Change
%
2013
General
and
administrative
expense:





















Personnel
related
expense
$10,395
$832

9%$9,563
$3,109

48%$6,454
Stock-based
compensation
expense

2,998

998

50%
2,000

1,206

152%
794
Professional
fees
expense

5,078

553

12%
4,525

1,880

71%
2,645
Rent
and
other
facilities
expense

2,626

1,122

75%
1,504

27

2%
1,477
Other
expense

1,486

224

18%
1,262

532

73%
730
Total

22,583
$3,729

20%$18,854
$6,754

56%$12,100
Table
of
Contentscompared
to
the
same
period
in
2013
primarily
due
to
higher
interest
expense
associated
with
our
loan
which
was
outstanding
for
the
full
year
in
2014
and
onlyhalf
a
year
in
2013.Other income (expense), net







Other
income
(expense),
net,
increased
$68,000
for
the
year
ended
December
31,
2015
compared
to
the
same
period
in
2014
primarily
due
to
interest
incomereceived.







Other
income
(expense),
net,
was
$72,000
for
the
year
ended
December
31
2014
compared
to
$(2.2)
million
for
the
the
same
period
in
2013
primarily
due
tothe
one-time
$2.1
million
expense
related
to
the
increase
in
the
fair
value
of
the
preferred
stock
liability
associated
with
our
obligation
to
issue
additional
shares
ofSeries
C
convertible
preferred
stock,
and
an
$86,000
expense
related
to
the
increase
in
the
fair
value
of
the
preferred
stock
warrant
liability
in
the
year
endedDecember
31,
2013.Liquidity
and
Capital
Resources







We
have
incurred
net
losses
since
our
inception.
For
the
years
ended
December
31,
2015,
2014
and
2013,
we
had
a
net
loss
of
$33.7
million,
$29.4
millionand
$25.6
million,
respectively,
and
we
expect
to
incur
additional
losses
in
2016
and
in
future
years.
As
of
December
31,
2015,
we
had
an
accumulated
deficit
of$148.7
million.
We
may
never
achieve
revenue
sufficient
to
offset
our
expenses.







In
April
2015,
we
completed
a
private
placement
of
4,907,975
shares
of
our
common
stock
to
certain
accredited
investors,
the
Investors,
at
a
purchase
price
of$8.15
per
share.
Gross
proceeds
to
us
were
$40.0
million
and
we
received
$37.3
million
in
net
proceeds,
after
deducting
placement
agent
fees
and
other
expensespayable
by
us
of
$2.7
million.







We
believe
our
existing
cash
and
cash
equivalents
of
$39.1
million
as
of
December
31,
2015
and
our
revenue
during
the
next
12
months
will
be
sufficient
tomeet
our
anticipated
cash
requirements
for
at
least
the
next
12
months.







From
inception
through
December
31,
2015,
we
have
received
$192.0
million
in
net
proceeds
from
various
sources
to
finance
our
operations,
including
netproceeds
of
$78.6
million
from
sales
of
our
preferred
stock,
net
proceeds
of
$59.2
million
from
our
IPO,
net
proceeds
of
$37.3
million
from
our
sale
of
commonstock
in
a
private
placement,
$10.0
million
from
the
Genzyme
co-promotion
agreement,
net
borrowings
of
$4.9
million
under
our
loan
and
security
agreement,
and$2.0
million
from
the
exercise
of
stock
options.







In
June
2013,
we
entered
into
a
loan
and
security
agreement
with
a
financial
institution,
or
the
Original
Loan.
The
Original
Loan
provided
for
term
loans
of
upto
$10.0
million
in
aggregate.
We
drew
down
$5.0
million
in
funds
under
the
agreement
in
June
2013,
and
did
not
draw
the
remaining
$5.0
million
on
or
before
theexpiration
date
of
March
31,
2014.
We
were
required
to
repay
the
outstanding
principal
in
30
equal
installments
beginning
18
months
after
the
date
of
theborrowing
and
the
loan
was
due
in
full
in
June
2017.
The
Original
Loan
had
an
interest
rate
of
6.06%
per
annum,
carried
prepayment
penalties
of
2.25%
and
1.50%for
prepayment
within
one
and
two
years,
respectively,
and
0.75%
thereafter.







In
December
2014,
we
amended
certain
terms
and
conditions
of
the
Original
Loan,
which
we
refer
to
as
the
Amended
Loan.
The
Amended
Loan
provides
forterm
loans
of
up
to
$15.0
million
in
aggregate,
in
three
tranches
of
$5.0
million
each.
We
borrowed
$5.0
million
under
the
first
tranche
in
December
2014
and
usedthe
funds
for
repayment
of
the
$5.0
million
in
principal
outstanding
under
the
Original
Loan,
in
a
cashless
transaction.
In
addition,
we
paid
the
accrued
but
unpaidinterest
of
$14,000
due
on
the
Original
Loan
and
the
related
end-of-term
payment
of
$110,000.
The
Amended
Loan
waived
the
prepayment
premium
of
$75,000under
the
Original
Loan
and
reduced
the
end-of-term
payment
of
$225,000
under
the
Original
Loan
to
$110,000.
In
November
2015,
we
further
amended
theAmended
Loan
to
extend
the
availability
of
the
second
$5.0
million
tranche
under
the
Amended
Loan
through
June
30,
2016
from82Table
of
ContentsDecember
31,
2015
originally.
We
may
borrow
the
third
$5.0
million
tranche
any
time
through
June
30,
2016
after
achieving
the
third
tranche
revenue
milestone
asdefined
in
the
Amended
Loan.







Under
the
Amended
Loan,
we
are
required
to
repay
the
outstanding
principal
in
24
equal
installments
beginning
24
months
after
the
date
of
the
borrowing
andthe
loan
is
due
in
full
in
December
2018.
The
first
tranche
of
the
Amended
Loan
bears
interest
at
a
rate
of
5.00%
per
annum
and
the
obligation
includes
an
end-of-term
payment
of
$237,500,
representing
4.75%
of
the
total
outstanding
principal
balance,
which
accretes
over
the
life
of
the
loan
as
interest
expense.
The
AmendedLoan
carries
prepayment
penalties
of
2.00%
and
1.00%
for
prepayment
within
one
and
two
years,
respectively,
and
no
prepayment
penalty
thereafter.
Inconnection
with
the
Amended
Loan,
we
paid
approximately
$45,000
in
third-party
fees.
As
a
result
of
the
debt
discount
and
the
end-of-term
payment,
the
effectiveinterest
rate
for
the
Amended
Loan
differs
from
the
contractual
rate.







Loans
drawn
under
the
Original
Loan
and
the
Amended
Loan
were
used
for
working
capital
and
general
corporate
purposes.
Our
obligations
under
theAmended
Loan
are
secured
by
a
security
interest
on
substantially
all
of
our
assets,
excluding
our
intellectual
property
and
certain
other
assets.
The
Amended
Loancontains
customary
conditions
related
to
borrowing,
events
of
default,
and
covenants,
including
covenants
limiting
our
ability
to
dispose
of
assets,
undergo
achange
in
control,
merge
with
or
acquire
other
entities,
incur
debt,
incur
liens,
pay
dividends
or
other
distributions
to
holders
of
our
capital
stock,
repurchase
stockand
make
investments,
in
each
case
subject
to
certain
exceptions.
The
Amended
Loan
also
allows
the
lender
to
call
the
debt
in
the
event
there
is
a
material
adversechange
in
our
business
or
financial
condition.
We
are
required
to
be
in
compliance
with
a
minimum
liquidity
or
minimum
revenue
covenant.
As
of
December
31,2015,
we
were
in
compliance
with
the
financial
covenants.







In
conjunction
with
the
acquisition
of
Allegro
in
September
2014,
we
issued
964,377
shares
of
our
common
stock,
paid
$2.7
million
in
cash,
settled
in
cashoutstanding
indebtedness
of
Allegro
totaling
$4.3
million,
and
paid
severance
and
bonus
to
Allegro
personnel
of
$1.2
million.







We
expect
that
our
near-
and
longer-term
liquidity
requirements
will
continue
to
consist
of
selling
and
marketing
expenses,
research
and
developmentexpenses,
working
capital,
and
general
corporate
expenses
associated
with
the
growth
of
our
business,
as
well
as
our
new
facility
build
out.
However,
we
may
alsouse
cash
to
acquire
or
invest
in
complementary
businesses,
technologies,
services
or
products
that
would
change
our
cash
requirements.
If
we
are
not
able
togenerate
revenue
to
finance
our
cash
requirements,
we
will
need
to
finance
future
cash
needs
primarily
through
public
or
private
equity
offerings,
debt
financings,borrowings
or
strategic
collaborations
or
licensing
arrangements.
If
we
raise
funds
by
issuing
equity
securities,
dilution
to
stockholders
may
result.
Any
equitysecurities
issued
may
also
provide
for
rights,
preferences
or
privileges
senior
to
those
of
holders
of
our
common
stock.
If
we
raise
funds
by
issuing
debt
securities,these
debt
securities
would
have
rights,
preferences
and
privileges
senior
to
those
of
holders
of
our
common
stock.
The
terms
of
debt
securities
or
borrowingscould
impose
significant
restrictions
on
our
operations.
If
we
raise
funds
through
collaborations
and
licensing
arrangements,
we
might
be
required
to
relinquishsignificant
rights
to
our
technologies
or
products,
or
grant
licenses
on
terms
that
are
not
favorable
to
us.
The
credit
market
and
financial
services
industry
have
inthe
past,
and
may
in
the
future,
experience
periods
of
upheaval
that
could
impact
the
availability
and
cost
of
equity
and
debt
financing.
If
we
are
not
able
to
secureadditional
funding
when
needed,
on
acceptable
terms,
we
may
have
to
delay,
reduce
the
scope
of
or
eliminate
one
or
more
research
and
development
programs
orselling
and
marketing
initiatives.
In
addition,
we
may
have
to
work
with
a
partner
on
one
or
more
of
our
product
or
market
development
programs,
which
couldlower
the
economic
value
of
those
programs
to
us.83Table
of
Contents







The
following
table
summarizes
our
cash
flows
for
the
years
ended
December
31,
2015,
2014
and
2013
(in
thousands
of
dollars):Cash
Flows
from
Operating
Activities







Cash
used
in
operating
activities
for
the
year
ended
December
31,
2015
was
$27.0
million.
The
net
loss
of
$33.7
million
includes
non-cash
charges
of$1.9
million
in
amortization
of
the
deferred
fee
received
from
Genzyme,
offset
primarily
by
$5.6
million
of
stock-based
compensation
expense,
$2.3
million
ofdepreciation
and
amortization,
which
includes
$0.8
million
intangible
asset
amortization
following
the
launch
of
Percepta
in
April
2015,
$0.1
million
inamortization
of
debt
discount
and
issuance
costs
and
debt
balloon
interest
expense,
and
$0.1
million
of
bad
debt
expense.
The
increase
in
net
operating
assets
of$0.5
million
was
due
to
a
increase
of
$0.9
million
in
deferred
rent,
accounts
payable
and
accrued
liabilities
primarily
from
deferred
rent
from
the
lease
for
our
newSouth
San
Francisco
facility,
offset
by
$0.4
million
from
an
increase
in
accounts
receivable
due
to
increases
in
Afirma
adoption
and
additional
payers
meeting
ourrevenue
recognition
criteria
for
accrual.







Cash
used
in
operating
activities
for
the
year
ended
December
31,
2014
was
$27.6
million.
The
net
loss
of
$29.4
million
includes
non-cash
charges
of$2.3
million
in
amortization
of
the
deferred
fee
received
from
Genzyme,
offset
primarily
by
$3.5
million
of
stock-based
compensation
expense,
$1.2
million
ofdepreciation
and
amortization,
$0.2
million
in
amortization
of
debt
discount
and
issuance
costs
and
debt
balloon
interest
expense,
and
$0.1
million
of
bad
debtexpense.
The
increase
in
net
operating
assets
of
$0.9
million
was
primarily
due
to
a
$2.0
million
increase
in
accounts
receivable
due
to
increases
in
Afirmaadoption
and
new
payers
for
whom
revenue
is
recognized
on
an
accrual
basis,
a
$1.1
million
increase
in
supplies
inventory
due
to
the
increased
volume
of
testingperformed
and
a
strategic
decision
to
increase
our
inventory
on
hand,
offset
by
a
$2.2
million
net
increase
in
accounts
payable
and
accrued
liabilities
resulting
fromthe
timing
of
payments.







Cash
used
in
operating
activities
for
the
year
ended
December
31,
2013
was
$19.2
million.
The
net
loss
of
$25.6
million
was
offset
by
non-cash
charges
of$2.1
million
for
the
change
in
the
value
of
the
preferred
stock
liability,
$2.5
million
in
amortization
of
the
deferred
fee
received
from
Genzyme,
$1.2
million
ofstock-based
compensation,
$1.0
million
of
depreciation
and
amortization,
$0.1
million
of
bad
debt
expense,
a
$0.1
million
charge
for
the
change
in
value
of
thepreferred
stock
warrant
liability,
and
$0.1
million
for
non-cash
interest
on
the
outstanding
debt.
The
increase
in
net
changes
in
assets
and
liabilities
of
$4.3
millionwas
primarily
due
to
a
$7.2
million
increase
in
accounts
payable
and
accrued
liabilities
due
to
timing
of
payments
offset
by
a
$2.9
million
increase
in
assets,including
a
$0.7
million
increase
in
prepaid
expenses
due
primarily
to
increased
public
company
related
prepaid
insurance
premiums,
a
$1.5
million
increase
insupply
inventory
due
to
the
increase
in
volume
of
testing
performed,
and
a
$0.7
million
increase
in
accounts
receivable
due
to
increased
revenues
from
Medicare.Cash
Flows
from
Investing
Activities







Cash
used
in
investing
activities
for
the
year
ended
December
31,
2015
was
$6.7
million.
The
investing
activities
for
the
year
ended
December
31,
2015consisted
of
$6.2
million
used
for
the
acquisition
of
property
and
equipment,
primarily
for
the
build
out
of
office
space
and
the
new
laboratory
for
our
new
SouthSan
Francisco
facility
and
$0.5
million
used
as
collateral
for
an
irrevocable
standby
letter
of
credit
as
security
for
our
new
South
San
Francisco
facility.84


Years
Ended
December
31,



2015
2014
2013
Cash
used
in
operating
activities
$(26,965)$(27,632)$(19,159)Cash
used
in
investing
activities

(6,698)
(9,010)
(1,282)Cash
provided
by
financing
activities

37,733

436

77,659
Table
of
Contents







Cash
used
in
investing
activities
for
the
year
ended
December
31,
2014
was
$9.0
million.
The
investing
activities
for
the
year
ended
December
31,
2014consisted
of
$6.9
million
of
net
cash
used
for
the
acquisition
of
Allegro,
$2.0
million
used
for
the
purchase
of
laboratory
equipment,
software
and
leaseholdimprovements,
and
$0.1
million
of
restricted
use
cash
to
cover
the
hold-back
liabilities
associated
with
the
acquisition
of
Allegro.







Cash
used
in
investing
activities
for
the
year
ended
December
31,
2013
was
$1.3
million.
The
investing
activities
for
the
year
ended
December
31,
2013consisted
of
purchased
laboratory
equipment,
software
and
leasehold
improvements
of
$1.3
million.Cash
Flows
from
Financing
Activities







Cash
provided
by
financing
activities
for
the
year
ended
December
31,
2015
was
$37.7
million,
consisting
of
$37.3
million
of
net
proceeds
from
the
sale
ofour
common
stock
in
a
private
placement
and
$0.7
million
of
cash
received
from
the
exercise
of
options
to
purchase
our
common
stock,
offset
by
$0.2
millionspent
on
deferred
stock
offering
costs
related
to
our
shelf
registration
statement.







Cash
provided
by
financing
activities
for
the
year
ended
December
31,
2014
of
$0.4
million
consisted
of
$0.7
million
we
received
from
the
exercise
of
optionsto
purchase
our
common
stock,
offset
by
$0.1
million
of
IPO-related
disbursements
and
a
$0.1
million
end-of-term
payment
on
our
Original
Loan.







Cash
provided
by
financing
activities
for
the
year
ended
December
31,
2013
of
$77.7
million
consisted
of
the
receipt
of
$59.3
million
in
net
proceeds
from
theissuance
of
common
stock
in
connection
with
our
IPO,
the
receipt
of
$12.9
million
in
net
proceeds
from
the
sale
of
our
convertible
preferred
stock,
net
borrowingsof
$4.9
million
under
the
Original
Loan
and
$0.6
million
from
the
exercise
of
options
to
purchase
our
common
stock.Contractual
Obligations







The
following
table
summarizes
certain
contractual
obligations
as
of
December
31,
2015
(in
thousands
of
dollars):







In
April
2015,
we
signed
a
non-cancelable
lease
agreement
for
approximately
59,000
square
feet
to
serve
as
our
new
South
San
Francisco
facility.
The
leasebegan
in
June
2015
and
expires
in
March
2026,
and
contains
extension
of
lease
term
and
expansion
options.
In
conjunction
with
this
lease,
the
landlord
isproviding
funding
of
approximately
$3.3
million
for
tenant
improvements,
all
of
which
has
been
received
as
of
December
31,
2015.
We
have
incurred
costs
ofapproximately
$2.7
million
of
costs
in
addition
to
the
landlord's
tenant
allowance
as
of
December
31,
2015
and
expect
to
incur
further
costs
of
$1.3
million
in
2016to
complete
the
build-out
of
the
facility.
The
lease
for
our
previous
South
San
Francisco
headquarters
and
laboratory
facility
expires
on
March
31,
2016.







In
November
2012,
we
entered
into
a
non-cancelable
lease
agreement
commencing
February
2013
for
our
laboratory
and
office
space
in
Austin,
Texas.
Thelease
expires
in
July
2018.85


Payments
Due
by
Period



Less
than
1
Year
1
to
3
Years
3
to
5
Years
More
than
5
Years
Total
Operating
lease
obligations
$1,821
$4,245
$4,108
$11,956
$22,130
Long-term
debt
obligations

—

5,000

—

—

5,000
Interest
on
debt
and
balloon
payment

254

506

—

—

760
Supplies
purchase
commitments

837

—

—

—

837
Total
$2,912
$9,751
$4,108
$11,956
$28,727
Table
of
ContentsOff-balance
Sheet
Arrangements







We
have
not
entered
into
any
off-balance
sheet
arrangements.JOBS
Act
Accounting
Election







We
are
an
emerging
growth
company,
as
defined
in
the
Jumpstart
Our
Business
Startups
Act
of
2012,
or
the
JOBS
Act.
Under
the
JOBS
Act,
emerginggrowth
companies
can
delay
adopting
new
or
revised
accounting
standards
issued
subsequent
to
the
enactment
of
the
JOBS
Act
until
such
time
as
those
standardsapply
to
private
companies.
We
have
irrevocably
elected
not
to
avail
ourselves
of
this
exemption
from
new
or
revised
accounting
standards
and,
therefore,
will
besubject
to
the
same
new
or
revised
accounting
standards
as
other
public
companies
that
are
not
emerging
growth
companies.Recent
Accounting
Pronouncements







In
May
2014,
the
Financial
Accounting
Standards
Board,
or
FASB,
issued
Accounting
Standards
Update,
or
ASU,
No.
2014-09,
Revenue from Contracts withCustomers ,
requiring
an
entity
to
recognize
the
amount
of
revenue
to
which
it
expects
to
be
entitled
for
the
transfer
of
promised
goods
or
services
to
customers.The
updated
standard
will
replace
most
existing
revenue
recognition
guidance
in
GAAP
when
it
becomes
effective
and
permits
the
use
of
either
the
retrospective
orcumulative
effect
transition
method.
Adoption
is
permitted
as
early
as
the
first
quarter
of
2017
and
is
required
by
the
first
quarter
of
2018.
We
have
not
yet
selecteda
transition
method
and
are
currently
evaluating
the
potential
effect
of
the
updated
standard
on
our
financial
statements.







In
August
2014,
FASB
issued
Accounting
Standards
Update
No.
2014-15,
Presentation of Financial Statements Going Concern—Disclosure of Uncertaintiesabout an Entity's Ability to Continue as a Going Concern .
The
amendments
require
management
to
assess
an
entity's
ability
to
continue
as
a
going
concern
byincorporating
and
expanding
upon
certain
principles
that
are
currently
in
U.S.
auditing
standards.
Specifically,
the
amendments:
(1)
provide
a
definition
of
the
termsubstantial
doubt;
(2)
require
an
evaluation
every
reporting
period
including
interim
periods;
(3)
provide
principles
for
considering
the
mitigating
effect
ofmanagement's
plans;
(4)
require
certain
disclosures
when
substantial
doubt
is
alleviated
as
a
result
of
consideration
of
management's
plans;
(5)
require
an
expressstatement
and
other
disclosures
when
substantial
doubt
is
not
alleviated;
and
(6)
require
an
assessment
for
a
period
of
one
year
after
the
date
that
the
financialstatements
are
issued
(or
available
to
be
issued).
ASU
2014-15
will
be
effective
for
annual
periods
ending
after
December
15,
2016
and
interim
periods
withinannual
periods
beginning
after
December
15,
2016
with
early
adoption
permitted.
ASU
2014-15
will
be
effective
for
us
beginning
with
our
annual
report
for
fiscal2016
and
interim
periods
thereafter.
We
do
not
anticipate
that
the
adoption
of
this
ASU
will
have
a
significant
impact
on
our
financial
statements.







In
April
2015,
the
FASB
issued
ASU
No.
2015-03,
Simplifying the Presentation of Debt Issuance Costs ,
to
require
debt
issuance
costs
to
be
presented
as
anoffset
against
debt
outstanding.
The
update
does
not
change
current
guidance
on
the
recognition
and
measurement
of
debt
issuance
costs.
The
ASU
is
effective
forinterim
and
annual
periods
beginning
after
December
15,
2015.
Adoption
of
the
ASU
is
retrospective
to
each
prior
period
presented.
We
do
not
anticipate
that
theadoption
of
this
ASU
will
have
a
significant
impact
on
our
balance
sheet.







In
November
2015,
the
FASB
issued
ASU
2015-17,
Balance Sheet Classification of Deferred Taxes ,
related
to
balance
sheet
classification
of
deferred
taxes.The
ASU
requires
that
deferred
tax
assets
and
liabilities
be
classified
as
noncurrent
in
the
statement
of
financial
position,
thereby
simplifying
the
current
guidancethat
requires
an
entity
to
separate
deferred
assets
and
liabilities
into
current
and
noncurrent
amounts.
The
ASU
will
be
effective
for
us
beginning
in
the
first
quarterof
fiscal
year
2018
though
early
adoption
is
permitted.
We
have
early-adopted
the
ASU
as
of
December
31,
2015
and
our
statement
of
financial
position
as
of
thisdate
reflects
the
revised
classification
of
current
deferred
tax
assets
and86Table
of
Contentsliabilities
as
noncurrent.
We
have
early-adopted
this
ASU
prospectively
and
prior
periods
have
not
been
retrospectively
adjusted.
There
is
no
other
impact
on
ourfinancial
statements
of
early-adopting
the
ASU.ITEM
7A.



QUANTITATIVE
AND
QUALITATIVE
DISCLOSURES
ABOUT
MARKET
RISK








We
are
exposed
to
market
risks
in
the
ordinary
course
of
our
business.
These
risks
primarily
relate
to
interest
rates.
We
had
cash
and
cash
equivalents
of$39.1
million
as
of
December
31,
2015
which
consisted
of
bank
deposits
and
money
market
funds.
Such
interest-bearing
instruments
carry
a
degree
of
risk;however,
a
hypothetical
10%
change
in
interest
rates
during
any
of
the
periods
presented
would
not
have
had
a
material
impact
on
our
audited
financial
statements.87Table
of
ContentsITEM
8.



FINANCIAL
STATEMENTS
AND
SUPPLEMENTARY
DATA
Veracyte,
Inc.
Index
to
Financial
Statements
88


Page
No.
Reports
of
Independent
Registered
Public
Accounting
Firms

89
Balance
Sheets
as
of
December
31,
2015
and
2014

91
Statements
of
Operations
and
Comprehensive
Loss
for
the
Years
Ended
December
31,
2015,
2014
and
2013

92
Statements
of
Convertible
Preferred
Stock
and
Stockholders'
Equity
for
the
Years
Ended
December
31,
2015,2014
and
2013

93
Statements
of
Cash
Flows
for
the
Years
Ended
December
31,
2015,
2014
and
2013

94
Notes
to
Financial
Statements

95
Table
of
ContentsReport
of
Independent
Registered
Public
Accounting
FirmThe
Board
of
Directors
and
Stockholders
Veracyte,
Inc.We
have
audited
the
accompanying
balance
sheets
of
Veracyte,
Inc.
as
of
December
31,
2015
and
2014,
and
the
related
statements
of
operations
andcomprehensive
loss,
convertible
preferred
stock
and
stockholders'
equity,
and
cash
flows
for
each
of
the
two
years
in
the
period
ended
December
31,
2015.
Thesefinancial
statements
are
the
responsibility
of
the
Company's
management.
Our
responsibility
is
to
express
an
opinion
on
these
financial
statements
based
on
ouraudits.We
conducted
our
audits
in
accordance
with
the
standards
of
the
Public
Company
Accounting
Oversight
Board
(United
States).
Those
standards
require
that
weplan
and
perform
the
audit
to
obtain
reasonable
assurance
about
whether
the
financial
statements
are
free
of
material
misstatement.
We
were
not
engaged
toperform
an
audit
of
the
Company's
internal
control
over
financial
reporting.
Our
audits
included
consideration
of
internal
control
over
financial
reporting
as
a
basisfor
designing
audit
procedures
that
are
appropriate
in
the
circumstances,
but
not
for
the
purpose
of
expressing
an
opinion
on
the
effectiveness
of
the
Company'sinternal
control
over
financial
reporting.
Accordingly,
we
express
no
such
opinion.
An
audit
also
includes
examining,
on
a
test
basis,
evidence
supporting
theamounts
and
disclosures
in
the
financial
statements,
assessing
the
accounting
principles
used
and
significant
estimates
made
by
management,
and
evaluating
theoverall
financial
statement
presentation.
We
believe
that
our
audits
provide
a
reasonable
basis
for
our
opinion.In
our
opinion,
the
financial
statements
referred
to
above
present
fairly,
in
all
material
respects,
the
financial
position
of
Veracyte,
Inc.
at
December
31,
2015
and2014,
and
the
results
of
its
operations
and
its
cash
flows
for
each
of
the
two
years
in
the
period
ended
December
31,
2015,
in
conformity
with
U.S.
generallyaccepted
accounting
principles./s/
Ernst
&
Young
LLPRedwood
City,
California
March
14,
201689Table
of
ContentsReport
of
Independent
Registered
Public
Accounting
Firm
To
the
Board
of
Directors
and
Stockholders
of
Veracyte,
Inc.In
our
opinion,
the
accompanying
statements
of
operations
and
comprehensive
loss,
of
convertible
preferred
stock
and
stockholders'
equity,
and
of
cash
flowspresent
fairly,
in
all
material
respects,
the
results
of
operations
and
cash
flows
of
Veracyte,
Inc.
for
the
year
ended
December
31,
2013
in
conformity
withaccounting
principles
generally
accepted
in
the
United
States
of
America.
These
financial
statements
are
the
responsibility
of
the
Company's
management.
Ourresponsibility
is
to
express
an
opinion
on
these
financial
statements
based
on
our
audit.
We
conducted
our
audit
of
these
statements
in
accordance
with
thestandards
of
the
Public
Company
Accounting
Oversight
Board
(United
States).
Those
standards
require
that
we
plan
and
perform
the
audit
to
obtain
reasonableassurance
about
whether
the
financial
statements
are
free
of
material
misstatement.
An
audit
includes
examining,
on
a
test
basis,
evidence
supporting
the
amountsand
disclosures
in
the
financial
statements,
assessing
the
accounting
principles
used
and
significant
estimates
made
by
management,
and
evaluating
the
overallfinancial
statement
presentation.
We
believe
that
our
audit
provides
a
reasonable
basis
for
our
opinion./s/
PricewaterhouseCoopers
LLPSan
Jose,
California
March
20,
201490Table
of
ContentsVERACYTE,
INC.Balance
Sheets(in
thousands
of
dollars,
except
share
and
per
share
amounts)


The
accompanying
notes
are
an
integral
part
of
these
financial
statements.91


As
of
December
31,



2015
2014
Assets






Current
assets:






Cash
and
cash
equivalents
$39,084
$35,014
Accounts
receivable,
net
of
allowance
of
$117
and
$84
as
of
December
31,
2015
and
2014,respectively

3,503

3,050
Supplies
inventory

3,767

3,696
Prepaid
expenses
and
other
current
assets

1,461

1,218
Deferred
tax
asset

—

300
Restricted
cash

118

70
Total
current
assets

47,933

43,348
Property
and
equipment,
net

10,314

4,161
Finite-lived
intangible
assets,
net

15,200

—
Indefinite-lived
intangible
assets:
in-process
research
and
development

—

16,000
Goodwill

1,057

1,057
Restricted
cash

603

118
Other
assets

178

155
Total
assets
$75,285
$64,839
Liabilities
and
Stockholders'
Equity






Current
liabilities:






Accounts
payable
$5,085
$7,397
Accrued
liabilities

8,689

7,851
Deferred
Genzyme
co-promotion
fee

948

1,897
Total
current
liabilities

14,722

17,145
Long-term
debt

5,028

4,923
Deferred
tax
liability

—

300
Deferred
rent,
net
of
current
portion

4,283

149
Deferred
Genzyme
co-promotion
fee,
net
of
current
portion

—

948
Total
liabilities

24,033

23,465
Commitments
and
contingencies






Stockholders'
equity:






Preferred
stock,
$0.001
par
value;
5,000,000
shares
authorized,
no
shares
issued
and
outstandingas
of
December
31,
2015
and
2014

—

—
Common
stock,
$0.001
par
value;
125,000,000
shares
authorized,
27,685,291
and
22,523,529shares
issued
and
outstanding
as
of
December
31,
2015
and
2014,
respectively

28

23
Additional
paid-in
capital

199,950

156,373
Accumulated
deficit

(148,726)
(115,022)Total
stockholders'
equity

51,252

41,374
Total
liabilities
and
stockholders'
equity
$75,285
$64,839
Table
of
ContentsVERACYTE,
INC.Statements
of
Operations
and
Comprehensive
Loss(in
thousands
of
dollars,
except
share
and
per
share
amounts)


The
accompanying
notes
are
an
integral
part
of
these
financial
statements.92


Year
Ended
December
31,



2015
2014
2013
Revenue
$49,503
$38,190
$21,884
Operating
expenses:









Cost
of
revenue

21,497

16,606

12,607
Research
and
development

12,796

9,804

7,810
Selling
and
marketing

25,293

21,932

12,540
General
and
administrative

22,583

18,854

12,100
Intangible
asset
amortization

800

—

—
Total
operating
expenses

82,969

67,196

45,057
Loss
from
operations

(33,466)
(29,006)
(23,173)Interest
expense

(378)
(439)
(233)Other
income
(expense),
net

140

72

(2,174)Net
loss
and
comprehensive
loss
$(33,704)$(29,373)$(25,580)Net
loss
per
common
share,
basic
and
diluted
$(1.30)$(1.36)$(6.15)Shares
used
to
compute
net
loss
per
common
share,
basic
and
diluted

25,994,193

21,639,374

4,158,664
Table
of
ContentsVERACYTE,
INC.Statements
of
Convertible
Preferred
Stock
and
Stockholders'
Equity(in
thousands
of
dollars,
except
share
and
per
share
amounts)


The
accompanying
notes
are
an
integral
part
of
these
financial
statements.93


Convertible
Preferred
Stock


















Common
Stock












Additional
Paid-in
Capital
Accumulated
Deficit
Total
Stockholders'
Equity
(Deficit)



Shares
Amount
Shares
Amount
Balance
at
December
31,
2012

53,084,507
$63,372

667,684
$1
$1,597
$(60,069)$(58,471)Issuance
of
Series
C
convertible
preferred
stockin
June
2013
at
$1.89
per
share,
net
ofissuance
costs
of
$53

6,904,761

12,997

—

—

—

—

—
Extinguishment
of
preferred
stock
liability

—

2,653

—

—

—

—

—
Issuance
of
common
stock
on
exercise
of
stockoptions

—

—

377,966

—

552

—

552
Issuance
of
common
stock
in
initial
publicoffering,
net
of
discounts
and
commissions
of$4,642
and
issuance
costs
of
$2,507

—

—

5,100,351

5

59,151

—

59,156
Conversion
of
preferred
stock
into
commonstock
upon
initial
public
offering

(59,989,268)
(79,022)
14,997,312

15

79,007

—

79,022
Reclassification
of
preferred
stock
warrantliability
into
additional
paid-in
capital
uponinitial
public
offering

—

—

—

—

261

—

261
Stock-based
compensation
expense
(employee)

—

—

—

—

1,041

—

1,041
Stock-based
compensation
expense
(non-employee)

—

—

—

—

206

—

206
Equity-based
compensation

—

—

—

—

259

—

259
Common
stock
subject
to
repurchase

—

—

—

—

(3)
—

(3)Net
loss
and
comprehensive
loss

—

—

—

—

—

(25,580)
(25,580)Balance
at
December
31,
2013

—

—

21,143,313

21

142,071

(85,649)
56,443
Issuance
of
common
stock
on
exercise
of
stockoptions

—

—

402,100

1

674

—

675
Issuance
of
common
stock
on
cashless
exerciseof
stock
warrant

—

—

13,739

—

—

—

—
Common
stock
subject
to
repurchase










—

3

—

3
Issuance
of
common
stock
for
acquisition

—

—

964,377

1

10,077




10,078
Stock-based
compensation
expense
(employee)

—

—

—

—

3,388

—

3,388
Stock-based
compensation
expense
(non-employee)

—

—

—

—

160

—

160
Net
loss
and
comprehensive
loss

—

—

—

—

—

(29,373)
(29,373)Balance
at
December
31,
2014

—

—

22,523,529

23

156,373

(115,022)
41,374
Issuance
of
common
stock
on
exercise
of
stockoptions

—

—

253,787

—

722

—

722
Sale
of
common
stock
in
a
private
placement,
netof
issuance
costs
of
$2,742

—

—

4,907,975

5

37,253

—

37,258
Stock-based
compensation
expense
(employee)

—

—

—

—

5,302

—

5,302
Stock-based
compensation
expense
(non-employee)

—

—

—

—

110

—

110
Stock-based
compensation
expense
(ESPP)

—

—

—

—

190

—

190
Net
loss
and
comprehensive
loss

—

—

—

—

—

(33,704)
(33,704)Balance
at
December
31,
2015

—
$—

27,685,291
$28
$199,950
$(148,726)$51,252
Table
of
ContentsVERACYTE,
INC.Statements
of
Cash
Flows(in
thousands
of
dollars)


The
accompanying
notes
are
an
integral
part
of
these
financial
statements.94


Year
Ended
December
31,



2015
2014
2013
Operating
activities









Net
loss
$(33,704)$(29,373)$(25,580)Adjustments
to
reconcile
net
loss
to
net
cash
used
in
operating
activities:









Depreciation
and
amortization

2,254

1,175

999
Bad
debt
expense

105

54

109
Genzyme
co-promotion
fee
amortization

(1,897)
(2,269)
(2,500)Stock-based
compensation

5,602

3,548

1,247
Amortization
of
debt
discount
and
issuance
costs

46

97

56
Interest
on
debt
balloon
payment

79

81

42
Change
in
value
of
preferred
stock
liability

—

—

2,070
Change
in
value
of
preferred
stock
warrant
liability

—

—

86
Changes
in
operating
assets
and
liabilities:









Accounts
receivable

(558)
(1,961)
(683)Supplies
inventory

(71)
(1,129)
(1,517)Prepaid
expenses
and
current
other
assets

304

(38)
(722)Other
assets

(42)
(46)
24
Accounts
payable

(3,546)
1,874

3,348
Accrued
liabilities
and
deferred
rent

4,463

355

3,862
Net
cash
used
in
operating
activities

(26,965)
(27,632)
(19,159)Investing
activities









Purchases
of
property
and
equipment

(6,165)
(2,024)
(1,332)Cash
remitted
for
acquisition,
net
of
cash
received

—

(6,916)
—
Change
in
restricted
cash

(533)
(70)
50
Net
cash
used
in
investing
activities

(6,698)
(9,010)
(1,282)Financing
activities









Proceeds
from
the
issuance
of
long-term
debt,
net
of
debt
issuance
costs

—

—

4,877
Payment
of
end-of-term
debt
obligation

—

(110)
—
Proceeds
from
issuance
of
redeemable
convertible
preferred
stock,
net
of
issuance
costs

—

—

12,945
Proceeds
from
issuance
of
common
stock
in
a
private
placement,
net
of
issuance
costs

37,258

—

—
Proceeds
from
issuance
of
common
stock
in
initial
public
offering,
gross

—

—

66,304
Commissions
and
issuance
costs
relating
to
the
initial
public
offering

—

(129)
(7,019)Payment
of
deferred
stock
offering
costs

(247)
—

—
Proceeds
from
the
exercise
of
common
stock
options

722

675

552
Net
cash
provided
by
financing
activities

37,733

436

77,659
Net
increase
(decrease)
in
cash
and
cash
equivalents

4,070

(36,206)
57,218
Cash
and
cash
equivalents
at
beginning
of
period

35,014

71,220

14,002
Cash
and
cash
equivalents
at
end
of
period
$39,084
$35,014
$71,220
Supplementary
cash
flow
information
of
non-cash
investing
and
financing
activities:









Fair
value
of
common
stock
issued
for
acquisition

—
$10,078

—
Non-cash
issuance
of
long-term
debt

—

5,000

—
Non-cash
repayment
of
long-term
debt

—

(5,000)
—
Purchases
of
property
and
equipment
included
in
accounts
payable
and
accrued
liabilities
$1,825

383
$25
Non-cash
purchases
of
property
and
equipment

—

—

257
Transfer
of
preferred
stock
liability
to
equity

—

—

2,653
Preferred
stock
warrants

—

—

175
Conversion
of
preferred
stock
warrant
liability
to
common
stock
warrants

—

—

261
Issuance
of
common
stock
from
the
non-cash
exercise
of
common
stock
warrants

—

187

—
Conversion
of
convertible
preferred
stock
to
common
stock

—

—

79,022
IPO
costs
included
in
accounts
payable
and
accrued
liabilities

—

—

129
Cash
paid
for
interest
on
debt

278

307

132
Transfer
of
equity-based
compensation
from
liabilities
to
equity

—

—

259
Cash
paid
for
tax

22

—

—
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements1.
Organization
and
Description
of
Business







Veracyte,
Inc.
("Veracyte"
or
the
"Company")
was
incorporated
in
the
state
of
Delaware
on
August
15,
2006
as
Calderome,
Inc.
Calderome
operated
as
anincubator
until
early
2008.
On
March
4,
2008,
the
Company
changed
its
name
to
Veracyte,
Inc.
Veracyte
is
a
molecular
diagnostics
company
that
uses
genomictechnology
to
resolve
diagnostic
ambiguity.
The
Company
targets
diseases
in
which
large
numbers
of
patients
undergo
invasive
and
costly
diagnostic
proceduresthat
could
have
been
avoided
with
a
more
accurate
diagnosis
from
a
cytology
sample
taken
preoperatively.
By
improving
preoperative
diagnosis,
the
Companyhelps
patients
avoid
such
unnecessary
invasive
procedures
and
surgeries
while
reducing
healthcare
costs.







The
Company's
first
commercial
solution,
the
Afirma®
Thyroid
FNA
Analysis,
centers
on
the
proprietary
Afirma
Gene
Expression
Classifier
("GEC").
TheAfirma
GEC
helps
physicians
reduce
the
number
of
unnecessary
surgeries
by
employing
a
proprietary
142-gene
signature
to
preoperatively
determine
whetherthyroid
nodules
previously
classified
by
cytopathology
as
indeterminate
can
be
reclassified
as
benign.
The
Afirma
GEC
is
offered
directly
or
as
part
of
acomprehensive
solution
that
also
includes
cytopathology
testing
and
the
Afirma
Malignancy
Classifiers,
launched
in
May
2014.
The
Company
currently
marketsand
sells
Afrma
in
the
United
States
and
select
foreign
countries
through
a
co-promotion
agreement
with
Genzyme
Corporation,
a
subsidiary
of
Sanofi,
as
well
asselectively
through
other
distributors
internationally.
On
March
9,
2016,
the
Company
gave
notice
of
termination
of
the
Amended
Agreement
effectiveSeptember
9,
2016.







In
September
2014,
the
Company
acquired
Allegro
Diagnostics
Corp.
("Allegro")
to
accelerate
its
entry
into
pulmonology,
the
Company's
second
clinicalarea.
Allegro
was
a
privately-held
company
based
in
Maynard,
Massachusetts,
focused
on
the
development
of
genomic
tests
to
improve
the
preoperative
diagnosisof
lung
cancer.
See
Note
4.
In
April
2015,
the
Company
entered
the
lung
cancer
diagnostics
market
with
the
Percepta®
Bronchial
Genomic
Classifier,
a
newgenomic
test
to
resolve
ambiguity
in
lung
cancer
diagnosis.
The
Company
has
a
second
product
in
pulmonology
under
development
designed
to
preoperativelyidentify
patients
with
idiopathic
pulmonary
fibrosis
("IPF").







The
Company's
operations
are
based
in
South
San
Francisco,
California
and
Austin,
Texas,
and
it
operates
in
one
segment
in
the
United
States.Initial Public Offering







On
November
4,
2013,
the
Company
completed
an
initial
public
offering
("IPO")
of
its
common
stock.
In
connection
with
its
IPO,
the
Company
issued
andsold
5,100,351
shares
of
common
stock
at
a
price
to
the
public
of
$13.00
per
share.
As
a
result
of
the
IPO,
the
Company
received
$59.2
million
in
net
proceeds,after
deducting
underwriting
discounts
and
commissions
of
$4.6
million
and
offering
expenses
of
$2.5
million
payable
by
the
Company.
In
connection
with
theIPO,
the
Company's
outstanding
shares
of
convertible
preferred
stock
were
automatically
converted
into
14,997,312
shares
of
common
stock.2.
Summary
of
Significant
Accounting
PoliciesBasis of Presentation







The
Company's
financial
statements
have
been
prepared
in
accordance
with
accounting
principles
generally
accepted
in
the
United
States
("GAAP").
Thefinancial
statements
include
the
accounts
of
the
Company
and
its
former
wholly-owned
subsidiary,
which
was
dissolved
in
June
2015.
For
periods
prior
to
thesubsidiary
dissolution,
all
intercompany
accounts
and
transactions
were
eliminated
in
consolidation.95Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)Use of Estimates







The
preparation
of
the
financial
statements
in
conformity
with
GAAP
requires
management
to
make
estimates
and
assumptions
that
affect
the
reportedamounts
of
assets
and
liabilities
and
disclosure
of
contingent
assets
and
liabilities
as
of
the
date
of
the
financial
statements
and
the
reported
amounts
of
revenue
andexpenses
during
the
reporting
period.
Significant
items
subject
to
such
estimates
include:
revenue
recognition;
contractual
allowances;
allowance
for
doubtfulaccounts;
the
useful
lives
of
property
and
equipment;
the
recoverability
of
long-lived
assets;
the
estimation
of
the
fair
value
of
intangible
assets;
the
determinationof
fair
value
of
the
Company's
common
stock
prior
to
the
Company's
IPO;
stock
options;
preferred
stock
liability;
income
tax
uncertainties,
including
a
valuationallowance
for
deferred
tax
assets;
and
contingencies.
The
Company
bases
these
estimates
on
historical
and
anticipated
results,
trends,
and
various
otherassumptions
that
the
Company
believes
are
reasonable
under
the
circumstances,
including
assumptions
as
to
future
events.
These
estimates
form
the
basis
formaking
judgments
about
the
carrying
values
of
assets
and
liabilities
and
recorded
revenue
and
expenses
that
are
not
readily
apparent
from
other
sources.
Actualresults
could
differ
from
those
estimates
and
assumptions.Liquidity







The
Company
has
incurred
net
losses
since
its
inception
and
expects
to
incur
additional
losses
in
2016
and
in
future
years.
As
of
December
31,
2015,
theCompany
had
an
accumulated
deficit
of
$148.7
million.
The
Company
may
never
achieve
revenue
sufficient
to
offset
its
expenses.
The
Company
believes
its
cashand
cash
equivalents
of
$39.1
million
as
of
December
31,
2015
and
its
revenue
from
sales
in
2016
will
be
sufficient
to
meet
its
anticipated
cash
requirements
for
atleast
the
next
12
months.







In
April
2015,
the
Company
issued
and
sold
4,907,975
shares
of
its
common
stock
in
a
private
placement,
at
a
price
of
$8.15
per
share.
The
Companyreceived
$37.3
million
in
net
proceeds,
after
deducting
expenses
of
$2.7
million.







If
the
Company
is
not
able
to
generate
revenue
to
finance
its
cash
requirements,
the
Company
will
need
to
finance
future
cash
needs
primarily
through
publicor
private
equity
offerings,
debt
financings,
borrowings
or
strategic
collaborations
or
licensing
arrangements.
If
the
Company
is
not
able
to
secure
additionalfunding
when
needed,
on
acceptable
terms,
it
may
have
to
delay,
reduce
the
scope
of
or
eliminate
one
or
more
research
and
development
programs
or
selling
andmarketing
initiatives
which
may
have
a
material
adverse
effect
on
the
Company's
business,
results
of
operations,
financial
condition
and/or
its
ability
to
fund
itsscheduled
obligations
on
a
timely
basis
or
at
all.Concentrations of Credit Risk and Other Risks and Uncertainties







The
Company's
cash
and
cash
equivalents
are
deposited
with
one
major
financial
institution
in
the
United
States,
as
required
by
the
loan
and
securityagreement
discussed
in
Note
8.
Deposits
in
this
institution
may
exceed
the
amount
of
insurance
provided
on
such
deposits.
The
Company
has
not
experienced
anylosses
on
its
deposits
of
cash
and
cash
equivalents.







Several
of
the
components
of
the
Company's
sample
collection
kit
and
test
reagents
are
obtained
from
single-source
suppliers.
If
these
single-source
suppliersfail
to
satisfy
the
Company's
requirements
on
a
timely
basis,
it
could
suffer
delays
in
being
able
to
deliver
its
diagnostic
solutions,
a
possible
loss
of
revenue,
orincur
higher
costs,
any
of
which
could
adversely
affect
its
operating
results.96Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)







The
Company
is
also
subject
to
credit
risk
from
its
accounts
receivable
related
to
its
sales.
The
Company
generally
does
not
perform
evaluations
of
customers'financial
condition
and
generally
does
not
require
collateral.







Through
December
31,
2015,
all
of
the
Company's
revenue
have
been
derived
from
the
sale
of
Afirma.
To
date,
Afirma
has
been
delivered
primarily
tophysicians
in
the
United
States.
The
Company's
third-party
payers
in
excess
of
10%
of
revenue
and
their
related
revenue
as
a
percentage
of
total
revenue
were
asfollows:







As
the
number
of
payers
reimbursing
for
Afirma
increases,
the
percentage
of
revenue
derived
from
Medicare
and
other
significant
third-party
payers
haschanged
and
will
continue
to
change
as
a
percentage
of
total
revenue.







The
Company's
significant
third-party
payers
and
their
related
accounts
receivable
balance
at
December
31,
2015
and
2014
as
a
percentage
of
total
accountsreceivable
are
as
follows:







No
other
third-party
payer
represented
more
than
10%
of
the
Company's
accounts
receivable
balances
as
of
those
dates.Cash Equivalents







Cash
equivalents
consist
of
short-term,
highly
liquid
investments
with
original
maturities
of
three
months
or
less
from
the
date
of
purchase.
Cash
equivalentsconsist
of
amounts
invested
in
a
money
market
account
primarily
consisting
of
U.S.
Treasury
reserves.Restricted Cash







The
Company
had
deposits
of
$118,000
as
of
December
31,
2015
and
December
31,
2014,
restricted
from
withdrawal
and
held
by
a
bank
in
the
form
ofcollateral
for
irrevocable
standby
letters
of
credit
totaling
$118,000
held
as
security
for
the
lease
of
the
Company's
headquarters
and
laboratory
facilities
in
SouthSan
Francisco
that
expires
March
31,
2016.
This
restricted
cash
is
included
in
current
assets
as
of
December
31,
2015
and
in
long-term
assets
as
of
December
31,2014.
The
Company
also
had
deposits
of
$603,000
included
in
long-term
assets
as
of
December
31,
2015,
restricted
from
withdrawal
and
held
by
a97


Year
Ended
December
31,



2015
2014
2013
Medicare

26%
26%
32%United
Healthcare

14%
18%
18%Aetna

9%
11%
9%

49%
55%
59%


December
31,



2015
2014
Medicare

31%
64%United
Healthcare

25%
14%Aetna

23%
12%Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)bank
in
the
form
of
collateral
for
an
irrevocable
standby
letter
of
credit
held
as
security
for
the
lease
of
the
Company's
new
South
San
Francisco
facility
signed
inApril
2015.







The
Company
reserved
$70,000
in
cash
as
of
December
31,
2014
to
cover
liabilities
associated
with
the
acquisition
of
Allegro
as
discussed
in
Note
4.
Thisamount
was
paid
in
March
2015.Allowance for Doubtful Accounts







The
Company
estimates
an
allowance
for
doubtful
accounts
against
its
individual
accounts
receivable
based
on
estimates
of
expected
reimbursementconsistent
with
historical
payment
experience
in
relation
to
the
amounts
billed.
Bad
debt
expense
is
included
in
general
and
administrative
expense
on
theCompany's
statements
of
operations
and
comprehensive
loss.
Accounts
receivable
are
written
off
against
the
allowance
when
there
is
substantive
evidence
that
theaccount
will
not
be
paid.







The
balance
of
allowance
for
doubtful
accounts
as
of
December
31,
2015
and
2014,
including
charges
to
bad
debt
expense
and
write-offs,
net
of
recoveries,was
as
follows
(in
thousands
of
dollars):Supplies Inventory







Supplies
inventory
consists
of
test
reagents
and
other
consumables
primarily
used
in
the
sample
collection
kits
and
in
cytopathology
and
GEC
test
processingand
are
valued
at
the
lower
of
cost
or
market
value.
Cost
is
determined
using
actual
costs
on
a
first-in,
first-out
basis.Property and Equipment







Property
and
equipment
are
stated
at
cost
less
accumulated
depreciation
and
amortization.
Depreciation
is
computed
using
the
straight-line
method
over
theestimated
useful
lives
of
the
assets,
generally
between
three
and
five
years.
Leasehold
improvements
are
amortized
using
the
straight-line
method
over
the
shorterof
the
estimated
useful
life
of
the
asset
or
the
term
of
the
lease.
Maintenance
and
repairs
are
charged
to
expense
as
incurred,
and
improvements
and
betterments
arecapitalized.
When
assets
are
retired
or
otherwise
disposed
of,
the
cost
and
accumulated
depreciation
are
removed
from
the
balance
sheet
and
any
resulting
gain
orloss
is
reflected
in
the
statements
of
operations
and
comprehensive
loss
in
the
period
realized.Internal-use Software







The
Company
capitalizes
costs
incurred
in
the
application
development
stage
to
design
and
implement
the
software
used
in
the
tracking
and
reporting
oflaboratory
activity.
Costs
incurred
in
the
development
of
application
software
are
capitalized
and
amortized
over
an
estimated
useful
life
of
three
years
on
astraight-line
basis.
The
total
cost,
accumulated
depreciation
and
net
book
value
of
internal-use98


As
of
December
31,



2015
2014
Beginning
balance
$84
$107
Charged
to
expense

105

54
Write-offs,
net
of
recoveries

(72)
(77)Ending
balance
$117
$84
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)software
was
$1.3
million,
$534,000
and
$744,000,
respectively,
as
of
December
31,
2015,
and
was
$927,000,
$330,000
and
$597,000,
respectively,
as
ofDecember
31,
2014,
and
are
included
in
property
and
equipment
in
the
Company's
balance
sheets.
During
the
years
ended
December
31,
2015
and
2014,
theCompany
capitalized
$352,000
and
$445,000,
respectively,
of
software
development
costs.
Amortization
expense
totaled
$204,000,
$135,000
and
$108,000
in
theyears
ended
December
31,
2015,
2014
and
2013,
respectively.Business Combination







The
Company
accounts
for
acquisitions
using
the
acquisition
method
of
accounting
which
requires
the
recognition
of
tangible
and
identifiable
intangibleassets
acquired
and
liabilities
assumed
at
their
estimated
fair
values
as
of
the
business
combination
date.
The
Company
allocates
any
excess
purchase
price
over
theestimated
fair
value
assigned
to
the
net
tangible
and
identifiable
intangible
assets
acquired
and
liabilities
assumed
to
goodwill.
Transaction
costs
are
expensed
asincurred
in
general
and
administrative
expenses.
Results
of
operations
and
cash
flows
of
acquired
companies
are
included
in
the
Company's
operating
results
fromthe
date
of
acquisition.Finite-lived Intangible Assets







Finite-lived
intangible
assets
relates
to
intangible
assets
reclassified
from
indefinite-lived
intangible
assets,
following
the
launch
of
Percepta
in
April
2015.The
Company
amortizes
finite-lived
intangible
assets
using
the
straight-line
method
over
their
estimated
useful
life.
The
estimated
useful
life
of
15
years
was
usedfor
the
intangible
asset
related
to
the
Percepta
test
based
on
management's
estimate
of
product
life,
product
life
of
other
diagnostic
tests
and
patent
life.
TheCompany
tests
this
finite-lived
intangible
asset
for
impairment
when
events
or
circumstances
indicate
a
reduction
in
the
fair
value
below
its
carrying
amount.
Therewas
no
impairment
for
the
year
ended
December
31,
2015.Indefinite-lived Intangible Assets—In-process Research and Development







The
Company's
indefinite-lived
intangible
assets
are
comprised
of
acquired
in-process
research
and
development
("IPR&D").
The
fair
value
of
IPR&Dacquired
through
a
business
combination
is
capitalized
as
an
indefinite-lived
intangible
asset
until
the
completion
or
abandonment
of
the
related
research
anddevelopment
activities.
When
research
and
development
is
complete,
the
associated
assets
are
amortized
on
a
straight-line
basis
over
their
estimated
useful
lives.IPR&D
is
tested
for
impairment
annually
or
more
frequently
if
events
or
circumstances
indicate
that
the
fair
value
may
be
below
the
carrying
value
of
the
asset.The
Company
recognizes
an
impairment
loss
when
the
total
of
estimated
future
undiscounted
cash
flows
expected
to
result
from
the
use
of
the
asset
and
itseventual
disposition
are
less
than
its
carrying
amount.
Impairment,
if
any,
would
be
assessed
using
discounted
cash
flows
or
other
appropriate
measures
of
fairvalue.
There
were
no
impairments
for
the
years
ended
December
31,
2015
and
2014.Goodwill







Goodwill,
derived
from
the
Company's
acquisition
of
Allegro,
is
reviewed
for
impairment
on
an
annual
basis
or
more
frequently
if
events
or
circumstancesindicate
that
it
may
be
impaired.
The
Company's
goodwill
evaluation
is
based
on
both
qualitative
and
quantitative
assessments
regarding
the
fair
value
of
goodwillrelative
to
its
carrying
value.
The
Company
has
determined
that
it
operates
in
a
single
segment
and
has
a
single
reporting
unit
associated
with
the
development
andcommercialization
of99Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)diagnostic
products.
In
the
event
the
Company
determines
that
it
is
more
likely
than
not
the
carrying
value
of
the
reporting
unit
is
higher
than
its
fair
value,quantitative
testing
is
performed
comparing
recorded
values
to
estimated
fair
values.
If
impairment
is
present,
the
impairment
loss
is
measured
as
the
excess
of
therecorded
goodwill
over
its
implied
fair
value.
The
Company
performs
its
annual
evaluation
of
goodwill
during
the
fourth
quarter
of
each
fiscal
year.
There
were
noimpairments
for
the
years
ended
December
31,
2015
and
2014.Derivative Liability







The
Company
accounts
for
derivative
financial
instruments
as
either
equity
or
liabilities
based
upon
the
characteristics
and
provisions
of
each
instrument.
TheCompany
recorded
the
preferred
stock
liability
incurred
in
connection
with
its
Series
C
convertible
preferred
stock
and
the
preferred
stock
warrant
liability
relatedto
the
issuance
of
a
warrant
for
Series
C
convertible
preferred
stock,
each
as
a
derivative
financial
instrument
liability
at
their
fair
value
on
the
date
of
issuance,
andthe
Company
re-measured
them
on
each
subsequent
balance
sheet
date.
The
changes
in
fair
value
were
recognized
as
a
gain
or
loss
from
the
adjustment
to
otherincome
(expense),
net,
in
the
statements
of
operations
and
comprehensive
loss.
The
Company
estimated
the
fair
value
of
this
liability
using
option-pricing
modelsthat
include
assumptions
for
future
financings,
expected
volatility,
expected
life,
yield
and
risk-free
interest
rate.
The
preferred
stock
liability
was
extinguished
inJune
2013.
The
warrant
to
purchase
Series
C
convertible
preferred
stock
was
converted
into
a
warrant
to
purchase
the
Company's
common
stock
as
of
the
closingof
its
IPO
and
was
exercised
through
a
cashless
exercise
in
March
2014.Bonus Accruals







The
Company
accrues
for
liabilities
under
discretionary
employee
and
executive
bonus
plans.
These
estimated
compensation
liabilities
are
based
on
progressagainst
corporate
objectives
approved
by
the
Board
of
Directors,
compensation
levels
of
eligible
individuals,
and
target
bonus
percentage
levels.
The
Board
ofDirectors
and
the
Compensation
Committee
of
the
Board
of
Directors
review
and
evaluate
the
performance
against
these
objectives
and
ultimately
determine
whatdiscretionary
payments
are
made.
The
Company
accrued
$2.1
million
and
$1.1
million
as
of
December
31,
2015
and
2014,
respectively,
for
liabilities
associatedwith
these
employee
and
executive
bonus
plans
which
are
included
in
accrued
liabilities
in
the
Company's
balance
sheets.Fair Value of Financial Instruments







The
carrying
amounts
of
certain
financial
instruments
including
cash
and
cash
equivalents,
accounts
receivable,
prepaid
expenses
and
other
current
assets,accounts
payable
and
accrued
liabilities
approximate
fair
value
due
to
their
relatively
short
maturities.Revenue Recognition







The
Company
recognizes
revenue
in
accordance
with
the
provision
of
ASC
954-605,
Health Care Entities—Revenue Recognition. The
Company's
revenue
isgenerated
from
the
provision
of
diagnostic
services
using
the
Afirma
solution
and
the
service
is
completed
upon
the
delivery
of
test
results
to
the
prescribingphysician,
at
which
time
the
Company
bills
for
the
service.
The
Company
recognizes
revenue
related
to
billings
for
Medicare
and
commercial
payers
on
an
accrualbasis,
net
of
contractual
and
other
adjustments,
when
amounts
that
will
ultimately
be
realized
can
be
estimated.
Contractual
and
other
adjustments
represent
thedifference
between
the
list
price
(the
billing
rate)
and
the
estimated100Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)reimbursement
rate
for
each
payer.
Upon
ultimate
collection,
the
amount
received
from
Medicare
and
commercial
payers
where
reimbursement
was
estimated
iscompared
to
previous
estimates
and,
if
necessary,
the
contractual
allowance
is
adjusted
accordingly.
Until
a
contract
has
been
negotiated
with
a
commercial
payeror
governmental
program,
the
Afirma
solution
may
or
may
not
be
covered
by
these
entities'
existing
reimbursement
policies.
In
addition,
patients
do
not
enter
intodirect
agreements
with
the
Company
that
commit
them
to
pay
any
portion
of
the
cost
of
the
tests
in
the
event
that
their
insurance
declines
to
reimburse
theCompany.
In
the
absence
of
an
agreement
with
the
patient
or
other
clearly
enforceable
legal
right
to
demand
payment
from
the
patient,
the
related
revenue
is
onlyrecognized
upon
the
earlier
of
payment
notification,
if
applicable,
or
cash
receipt.







The
estimates
of
amounts
that
will
ultimately
be
realized
requires
significant
judgment
by
management.
Some
patients
have
out-of-pocket
costs
for
amountsnot
covered
by
their
insurance
carrier,
and
the
Company
may
bill
the
patient
directly
for
these
amounts
in
the
form
of
co-payments
and
co-insurance
in
accordancewith
their
insurance
carrier
and
health
plans.
Some
payers
may
not
cover
the
Company's
GEC
as
ordered
by
the
prescribing
physician
under
their
reimbursementpolicies.
The
Company
pursues
reimbursement
from
such
patients
on
a
case-by-case
basis.
In
the
absence
of
contracted
reimbursement
coverage
or
the
ability
toestimate
the
amount
that
will
ultimately
be
realized
for
the
Company's
services,
revenue
is
recognized
upon
the
earlier
of
receipt
of
third-party
payer
notification
ofpayment
or
when
cash
is
received.







Revenue
recognized
when
cash
is
received
and
on
an
accrual
basis
for
the
years
ended
December
31,
2015,
2014
and
2013
was
as
follows
(in
thousands
ofdollars):Cost of Revenue







Cost
of
revenue
is
expensed
as
incurred
and
includes
material
and
service
costs,
cytopathology
testing
services
performed
by
a
third-party
pathology
group,stock-based
compensation
expense,
direct
labor
costs,
equipment
and
infrastructure
expenses
associated
with
testing
samples,
shipping
charges
to
transportsamples,
and
allocated
overhead
including
rent,
information
technology,
equipment
depreciation
and
utilities.Research and Development







Research
and
development
costs
are
charged
to
operations
as
incurred.
Research
and
development
costs
include
payroll
and
personnel-related
expenses,
stock-based
compensation
expense,
prototype
materials,
laboratory
supplies,
consulting
costs,
costs
associated
with
setting
up
and
conducting
clinical
studies
at
domesticand
international
sites,
and
allocated
overhead
including
rent,
information
technology,
equipment
depreciation
and
utilities.101


Year
Ended
December
31,



2015
2014
2013
Revenue
recognized
when
cash
is
received
$22,460
$25,645
$14,586
Revenue
recognized
on
an
accrual
basis

27,043

12,545

7,298
Total
$49,503
$38,190
$21,884
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)Income Taxes







The
Company
accounts
for
income
taxes
under
the
liability
method.
Under
this
method,
deferred
tax
assets
and
liabilities
are
determined
based
on
thedifference
between
the
financial
statement
and
tax
bases
of
assets
and
liabilities
using
enacted
tax
rates
in
effect
for
the
year
in
which
the
differences
are
expectedto
affect
taxable
income.
Valuation
allowances
are
established
when
necessary
to
reduce
deferred
tax
assets
to
the
amounts
expected
to
be
realized.







The
Company
assesses
all
material
positions
taken
in
any
income
tax
return,
including
all
significant
uncertain
positions,
in
all
tax
years
that
are
still
subjectto
assessment
or
challenge
by
relevant
taxing
authorities.
The
Company's
assessment
of
an
uncertain
tax
position
begins
with
the
initial
determination
of
theposition's
sustainability
and
is
measured
at
the
largest
amount
of
benefit
that
is
more-likely-than-not
of
being
realized
upon
ultimate
settlement.
As
of
each
balancesheet
date,
unresolved
uncertain
tax
positions
must
be
reassessed,
and
the
Company
will
determine
whether
(i)
the
factors
underlying
the
sustainability
assertionhave
changed
and
(ii)
the
amount
of
the
recognized
tax
benefit
is
still
appropriate.
The
recognition
and
measurement
of
tax
benefits
requires
significant
judgment.Judgments
concerning
the
recognition
and
measurement
of
a
tax
benefit
may
change
as
new
information
becomes
available.Stock-based Compensation







Stock-based
compensation
expense
for
equity
instruments
issued
to
employees
is
measured
based
on
the
grant-date
fair
value
of
the
awards.
The
fair
value
ofeach
employee
stock
option
is
estimated
on
the
date
of
grant
using
the
Black-Scholes
option-pricing
model.
The
Company
recognizes
compensation
costs
on
astraight-line
basis
for
all
employee
stock-based
compensation
awards
that
are
expected
to
vest
over
the
requisite
service
period
of
the
awards,
which
is
generallythe
awards'
vesting
period.
Forfeitures
are
required
to
be
estimated
at
the
time
of
grant
and
revised,
if
necessary,
in
subsequent
periods
if
actual
forfeitures
differfrom
those
estimates.







Equity
awards
issued
to
non-employees
are
valued
using
the
Black-Scholes
option-pricing
model
and
are
subject
to
re-measurement
as
the
underlying
equityawards
vest.Net Loss per Common Share







Basic
net
loss
per
common
share
is
calculated
by
dividing
net
loss
attributable
to
common
stockholders
by
the
weighted-average
number
of
common
sharesoutstanding
during
the
period,
without
consideration
of
common
stock
equivalents.
Diluted
net
loss
per
common
share
is
computed
by
dividing
net
loss
attributableto
common
stockholders
by
the
weighted-average
number
of
common
share
equivalents
outstanding
for
the
period
determined
using
the
treasury
stock
method.Potentially
dilutive
securities
consisting
of
options
and
warrants
to
purchase
common
stock
are
considered
to
be
common
stock
equivalents
and
were
excludedfrom
the
calculation
of
diluted
net
loss
per
common
share
because
their
effect
would
be
anti-dilutive
for
all
periods
presented.Recent Accounting Pronouncements







In
May
2014,
the
Financial
Accounting
Standards
Board
("FASB")
issued
Accounting
Standards
Update
("ASU")
No.
2014-09,
Revenue from Contracts withCustomers ,
requiring
an
entity
to
recognize
the
amount
of
revenue
to
which
it
expects
to
be
entitled
for
the
transfer
of
promised
goods
or
services
to
customers.The
updated
standard
will
replace
most
existing
revenue
recognition
guidance
in
GAAP
when
it
becomes
effective
and
permits
the
use
of
either
the
retrospective
orcumulative
effect
transition
method.102Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)2.
Summary
of
Significant
Accounting
Policies
(Continued)Adoption
is
permitted
as
early
as
the
first
quarter
of
2017
and
is
required
by
the
first
quarter
of
2018.
The
Company
has
not
yet
selected
a
transition
method
and
arecurrently
evaluating
the
potential
effect
of
the
updated
standard
on
its
financial
statements.







In
August
2014,
FASB
issued
ASU
No.
2014-15,
Presentation of Financial Statements Going Concern—Disclosure of Uncertainties about an Entity's Abilityto Continue as a Going Concern .
The
amendments
require
management
to
assess
an
entity's
ability
to
continue
as
a
going
concern
by
incorporating
and
expandingupon
certain
principles
that
are
currently
in
U.S.
auditing
standards.
Specifically,
the
amendments:
(1)
provide
a
definition
of
the
term
substantial
doubt;
(2)
requirean
evaluation
every
reporting
period
including
interim
periods;
(3)
provide
principles
for
considering
the
mitigating
effect
of
management's
plans;
(4)
requirecertain
disclosures
when
substantial
doubt
is
alleviated
as
a
result
of
consideration
of
management's
plans;
(5)
require
an
express
statement
and
other
disclosureswhen
substantial
doubt
is
not
alleviated;
and
(6)
require
an
assessment
for
a
period
of
one
year
after
the
date
that
the
financial
statements
are
issued
(or
available
tobe
issued).
ASU
2014-15
will
be
effective
for
annual
periods
ending
after
December
15,
2016
and
interim
periods
within
annual
periods
beginning
afterDecember
15,
2016
with
early
adoption
permitted.
ASU
2014-15
will
be
effective
for
the
Company
beginning
with
its
annual
report
for
fiscal
2016
and
interimperiods
thereafter.
The
Company
does
not
anticipate
that
the
adoption
of
this
ASU
will
have
a
significant
impact
on
its
financial
statements.







In
April
2015,
the
FASB
issued
ASU
No.
2015-03,
Simplifying the Presentation of Debt Issuance Costs ,
to
require
debt
issuance
costs
to
be
presented
as
anoffset
against
debt
outstanding.
The
update
does
not
change
current
guidance
on
the
recognition
and
measurement
of
debt
issuance
costs.
The
ASU
is
effective
forinterim
and
annual
periods
beginning
after
December
15,
2015.
Adoption
of
the
ASU
is
retrospective
to
each
prior
period
presented.
The
Company
does
notanticipate
that
the
adoption
of
this
ASU
will
have
a
significant
impact
on
its
balance
sheet.







In
November
2015,
the
FASB
issued
ASU
2015-17,
Balance Sheet Classification of Deferred Taxes ,
related
to
balance
sheet
classification
of
deferred
taxes.The
ASU
requires
that
deferred
tax
assets
and
liabilities
be
classified
as
noncurrent
in
the
statement
of
financial
position,
thereby
simplifying
the
current
guidancethat
requires
an
entity
to
separate
deferred
assets
and
liabilities
into
current
and
noncurrent
amounts.
The
ASU
will
be
effective
for
the
Company
beginning
in
thefirst
quarter
of
fiscal
year
2018
though
early
adoption
is
permitted.
The
Company
has
early-adopted
the
ASU
as
of
December
31,
2015
and
its
statement
offinancial
position
as
of
this
date
reflects
the
revised
classification
of
current
deferred
tax
assets
and
liabilities
as
noncurrent.
The
Company
has
early-adopted
thisASU
prospectively
and
prior
periods
have
not
been
retrospectively
adjusted.
There
is
no
other
impact
on
the
Company's
financial
statements
of
early-adopting
theASU.103Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)3.
Net
Loss
Per
Share







The
following
table
presents
the
calculation
of
basic
and
diluted
net
loss
per
common
share
for
the
years
ended
December
31,
2015,
2014
and
2013
(inthousands
of
dollars,
except
share
and
per
share
amounts):







The
following
outstanding
common
stock
equivalents
have
been
excluded
from
diluted
net
loss
per
common
share
for
the
years
ended
December
31,
2015,2014
and
2013
because
their
inclusion
would
be
anti-dilutive:4.
Business
Combination







In
September
2014,
the
Company
acquired
Allegro
via
a
merger
with
Full
Moon
Acquisition,
Inc.,
a
wholly-owned
subsidiary
of
the
Company.
Allegro
was
aprivately-held
company
based
in
Maynard,
Massachusetts,
focused
on
the
development
of
genomic
tests
to
improve
the
preoperative
diagnosis
of
lung
cancer.Allegro
merged
with
Full
Moon,
(the
"Merger"),
with
Allegro
surviving
the
Merger
as
a
wholly-owned
subsidiary
of
the
Company.
The
subsidiary
was
dissolvedin
June
2015.
At
the
effective
time
of
the
Merger,
each
share
of
the
common
stock
of
Full
Moon
issued
and
outstanding
immediately
prior
to
the
effective
time
ofthe
Merger
was
automatically
converted
into
one
share
of
common
stock
of
Allegro
and
represented
the
only
outstanding
common
stock
of
Allegro
at
the
effectivetime
of
the
Merger;
all
previously
issued
and
outstanding
shares
of
common
stock
of
Allegro
were
canceled.
The
Series
A
preferred
stock
of
Allegro
issued
andoutstanding
immediately
prior
to
the
effective
time
of
the
Merger
was
canceled
and
automatically
converted
into
the
right
to
receive
a
total
of
964,377
shares
of
theCompany's
common
stock
and
$2.7
million
in
cash.
Outstanding
indebtedness
of
Allegro
totaling
$4.3
million
was
settled
in
cash
by
the
Company
on
the
effectivedate
of
the
Merger.
All
outstanding
stock
options
under
Allegro's
equity
incentive
plan
were
canceled.







The
acquisition
of
Allegro
accelerated
the
Company's
entry
into
the
pulmonology
diagnostics
market.
Allegro's
lung
cancer
test
is
designed
to
help
physiciansdetermine
which
patients
with
lung
nodules
who104


Year
Ended
December
31,



2015
2014
2013
Net
loss
$(33,704)$(29,373)$(25,580)Shares
used
to
compute
net
loss
per
common
share,
basic
anddiluted

25,994,193

21,639,374

4,158,664
Net
loss
per
common
share,
basic
and
diluted
$(1.30)$(1.36)$(6.15)


Year
Ended
December
31,



2015
2014
2013
Shares
of
common
stock
subject
to
outstanding
options

4,179,521

3,249,469

2,359,287
Shares
of
common
stock
issuable
upon
exercise
of
warrants

—

—

24,801
Total
shares
of
common
stock
equivalents

4,179,521

3,249,469

2,384,088
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)4.
Business
Combination
(Continued)have
had
an
inconclusive
bronchoscopy
result
are
at
low
risk
for
cancer
and
can
thus
be
safely
monitored
with
CT
scans
rather
than
undergoing
invasiveprocedures.
The
Company
launched
the
Percepta
test
in
April
2015.







The
Merger
was
accounted
for
using
the
acquisition
method
of
accounting
with
the
Company
treated
as
the
accounting
acquirer.
The
purchase
price
wasallocated
based
on
the
estimated
fair
value
of
the
assets
acquired
and
liabilities
assumed
at
the
date
of
the
acquisition.







The
Company
incurred
approximately
$0.5
million
in
acquisition-related
costs
related
to
the
Merger,
which
primarily
consisted
of
legal,
accounting
andvaluation-related
expenses.
In
addition,
the
Company
incurred
$1.2
million
related
to
transaction
bonuses
and
severance
payments
to
former
Allegro
employeesassociated
with
the
Merger.
These
expenses
were
recorded
in
general
and
administrative
expense
in
the
accompanying
statements
of
operations
and
comprehensiveloss.
Total
expenses
and
net
loss
associated
with
the
acquired
Allegro
business
in
the
Company's
statements
of
operations
and
comprehensive
loss
were
notseparately
identifiable
due
to
the
integration
with
the
Company's
operations.







The
acquisition
consideration
was
comprised
of
(in
thousands
of
dollars):







The
stock
consideration
of
$10.1
million
was
determined
based
on
the
closing
price
of
the
Company's
common
stock
on
September
16,
2014
($10.45
pershare).







The
fair
value
of
the
assets
acquired
and
liabilities
assumed
at
the
closing
date
of
the
Merger
are
summarized
below
(in
thousands
of
dollars):







The
fair
value
of
IPR&D
was
determined
using
the
multi-period
excess
earnings
method
of
the
income
approach,
which
estimates
the
economic
benefits
ofthe
IPR&D
over
multiple
time
periods
by
identifying
the
cash
flows
associated
with
the
use
of
the
asset,
based
on
forecasts
prepared
by
management,
anddeducting
a
periodic
charge
reflecting
a
fair
return
for
the
use
of
contributory
assets.
The
forecasted
cash
flows
were
discounted
based
on
a
discount
rate
of
18.5%.The
discount
rate
represents
the
Company's
weighted
average
return
on
assets
and
was
benchmarked
against
the
internal
rate
of
return
and
cost
of
capital
ofguideline
publicly
traded
companies.
The
fair
value
of
the
IPR&D
was
capitalized
as
of
the
closing
date
of
the
Merger
and
was
accounted
for
as
an
indefinite-livedintangible
asset
prior
to
the
beginning
of
amortization.







Amortization
of
the
IPR&D
began
in
April
2015
when
research
and
development
activities
were
deemed
to
be
completed
and
is
recorded
on
a
straight-linebasis.
The
amortization
period
of
the
IPR&D
is105Stock
$10,078
Cash

2,725
Payment
of
outstanding
indebtedness

4,290
Total
acquisition
consideration
$17,093
Cash
and
cash
equivalents
$29
Other
assets,
net

7
In-process
research
and
development

16,000
Goodwill

1,057
Total
net
assets
acquired
$17,093
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)4.
Business
Combination
(Continued)over
its
estimated
useful
life
of
15
years
after
taking
into
consideration
expected
use
of
the
asset,
legal
or
regulatory
provisions
that
may
limit
or
extend
the
life
ofthe
asset,
as
well
as
the
effects
of
obsolescence
and
other
economic
factors.
Amortization
of
$800,000
was
recorded
for
the
year
ended
December
31,
2015
andaccumulated
amortization
was
$800,000
as
of
December
31,
2015.
Amortization
expense
will
be
approximately
$1.1
million
per
year.







Goodwill,
which
represents
the
purchase
price
in
excess
of
the
fair
value
of
net
assets
acquired,
is
not
expected
to
be
deductible
for
income
tax
purposes.
Thisgoodwill
is
reflective
of
the
value
derived
from
the
acceleration
of
the
Company's
entry
into
the
pulmonology
market.Pro Forma Financial Information (Unaudited)







The
following
pro
forma
financial
information
is
based
on
the
historical
financial
statements
of
the
Company
and
presents
the
Company's
results
as
if
theMerger
had
occurred
as
of
January
1,
2013
(in
thousands
of
dollars):







The
pro
forma
results
present
the
combined
historical
results
of
operations
with
adjustments
to
reflect
one-time
charges
including:•The
reversal
of
costs
related
to
transaction
bonuses
and
other
payments
to
employees
and
acquisition-related
expenses
directly
related
to
the
Mergerof
$2.2
million
for
the
year
ended
December
31,
2014;
and
•the
elimination
of
interest
expense
related
to
Allegro
indebtedness
of
$2.3
million
and
$4.5
million
for
the
years
ended
December
31,
2014
and2013,
respectively.







The
pro
forma
information
presented
does
not
purport
to
present
what
the
actual
results
would
have
been
had
the
Merger
actually
occurred
on
January
1,2013,
nor
is
the
information
intended
to
project
results
for
any
future
period.106


Year
Ended
December
31,



2014
2013
Revenue
$38,190
$21,884
Net
loss
$(29,090)$(28,605)Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)5.
Balance
Sheet
ComponentsProperty and Equipment, Net







Property
and
equipment
consisted
of
the
following
(in
thousands
of
dollars):







Depreciation
and
amortization
expense
was
$1.5
million,
$1.2
million
and
$1.0
million
for
the
years
ended
December
31,
2015,
2014
and
2013,
respectively.Accrued Liabilities







Accrued
liabilities
consisted
of
the
following
(in
thousands
of
dollars):6.
Fair
Value
Measurements







The
Company
records
its
financial
assets
and
liabilities
at
fair
value.
The
carrying
amounts
of
certain
financial
instruments
of
the
Company,
including
cashand
cash
equivalents,
prepaid
expenses
and
other
current
assets,
accounts
payable
and
accrued
liabilities,
approximate
fair
value
due
to
their
relatively
shortmaturities.
The
carrying
value
of
debt
approximates
its
fair
value
because
the
interest
rate
approximates
market
rates
that
the
Company
could
obtain
for
debt
withsimilar
terms.
The
accounting
guidance
for
fair
value
provides
a
framework
for
measuring
fair
value,
clarifies
the
definition
of
fair
value,
and
expands
disclosuresregarding
fair
value
measurements.
Fair
value
is
defined
as
the
price
that
would
be
received
to
sell
an
asset
or
paid
to
transfer
a
liability
(an
exit
price)
in
an
orderlytransaction
between
market
participants
at
the
reporting
date.
The
accounting
guidance
establishes
a
three-tiered
hierarchy,
which
prioritizes
the
inputs
used
in
thevaluation
methodologies
in
measuring
fair
value
as
follows:•Level
I:
Inputs
which
include
quoted
prices
in
active
markets
for
identical
assets
and
liabilities.107


Year
Ended
December
31,



2015
2014
Leasehold
improvements
$789
$788
Laboratory
equipment

5,501

4,199
Computer
equipment

1,046

875
Software,
including
software
developed
for
internal
use

1,353

1,353
Furniture
and
fixtures

242

197
Construction-in-process

6,823

739
Total
property
and
equipment,
at
cost

15,754

8,151
Accumulated
depreciation
and
amortization

(5,440)
(3,990)Total
property
and
equipment,
net
$10,314
$4,161



Year
Ended
December
31,



2015
2014
Accrued
compensation
expenses
$4,212
$2,673
Accrued
Genzyme
co-promotion
fees

2,089

3,309
Accrued
other

2,388

1,869
Total
accrued
liabilities
$8,689
$7,851
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)6.
Fair
Value
Measurements
(Continued)•Level
II:
Inputs
other
than
Level
I
that
are
observable,
either
directly
or
indirectly,
such
as
quoted
prices
for
similar
assets
or
liabilities;
quotedprices
in
markets
that
are
not
active;
or
other
inputs
that
are
observable
or
can
be
corroborated
by
observable
market
data
for
substantially
the
fullterm
of
the
assets
or
liabilities.
•Level
III:
Unobservable
inputs
that
are
supported
by
little
or
no
market
activity
and
that
are
significant
to
the
fair
value
of
the
assets
or
liabilities.







The
fair
value
of
the
Company's
financial
assets,
which
consist
only
of
money
market
funds,
was
$37.5
million
and
$33.2
million
as
of
December
31,
2015and
December
31,
2014,
respectively,
and
are
Level
I
assets
as
described
above.







The
Company
has
no
Level
III
liabilities
as
of
December
31,
2015
and
2014.
The
following
table
sets
forth
the
changes
in
the
fair
value
of
the
Company'sLevel
III
financial
liabilities,
which
consisted
of
a
preferred
stock
liability
during
2013,
which
were
measured
on
a
recurring
basis
(in
thousands
of
dollars):







In
November
2012,
the
Company
recorded
a
preferred
stock
liability
as
investors
received
the
right
to
purchase
from
the
Company,
on
the
same
terms,additional
shares
of
Series
C
convertible
preferred
stock,
in
a
second
tranche.
As
the
investors
held
a
majority
of
the
board
seats,
the
decision
to
complete
thesecond
tranche
was
deemed
to
be
outside
the
control
of
the
Company.
The
preferred
stock
liability
was
valued
using
the
option-pricing
method,
which
resulted
inan
initial
fair
value
of
$0.9
million
for
the
Company's
obligation
to
sell
the
convertible
preferred
stock.
In
June
2013,
the
Company
settled
the
preferred
stockliability
upon
completion
of
the
sale
of
the
second
tranche
of
Series
C
convertible
preferred
stock.
Immediately
prior
to
settlement,
the
Company
revalued
thepreferred
stock
liability
to
$2.7
million
and
recorded
other
expense
of
$2.1
million
related
to
the
change
in
value
of
the
liability
through
that
date.
The
preferredstock
liability
was
valued
using
the
option-pricing
method
with
the
following
assumptions:
100%
probability
of
success
of
the
second
tranche,
fair
value
ofSeries
C
preferred
stock
of
$2.39,
a
term
of
0.003
years
and
expected
volatility
of
36.4%.7.
Commitments
and
ContingenciesOperating Leases







The
Company
leases
its
headquarters
and
South
San
Francisco,
California
laboratory
facilities
under
a
non-cancelable
lease
agreement
that
expires
onMarch
31,
2016.
In
April
2015,
the
Company
signed
a108


Year
Ended
December
31,
2013
Beginning
balance
$583
Change
in
fair
value
of
preferred
stock
liability
recorded
as
other
expense,
net

2,070
Settlement
of
preferred
stock
liability

(2,653)Fair
value
of
preferred
stock
warrant
liability

175
Change
in
fair
value
of
preferred
stock
warrant
liability
recorded
as
other
expense,
net

86
Conversion
of
preferred
stock
warrant
liability

(261)Ending
balance
$—
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)7.
Commitments
and
Contingencies
(Continued)non-cancelable
lease
agreement
for
approximately
59,000
square
feet
to
serve
as
its
new
South
San
Francisco
facility.
The
lease
began
in
June
2015
and
ends
inMarch
2026
and
contains
extension
of
lease
term
and
expansion
options.
In
conjunction
with
this
lease,
the
landlord
provided
funding
of
approximately$3.3
million
for
tenant
improvements,
all
of
which
has
been
received
as
of
December
31,
2015.
The
Company
has
incurred
approximately
$2.7
million
in
additionto
the
landlord's
tenant
allowance
as
of
December
31,
2015
and
expects
to
incur
further
costs
of
$1.3
million
in
2016
to
complete
the
build-out
of
the
facility.
TheCompany
had
deposits
of
$603,000
included
in
long-term
assets
as
of
December
31,
2015,
restricted
from
withdrawal
and
held
by
a
bank
in
the
form
of
collateralfor
an
irrevocable
standby
letter
of
credit
totaling
$603,000
held
as
security
for
the
lease
of
the
new
South
San
Francisco
facility.







The
Company
also
leases
laboratory
space
in
Austin,
Texas.
The
lease
expires
on
July
31,
2018.
The
Company
provided
a
cash
security
deposit
of
$75,000,which
is
included
in
other
assets
in
the
Company's
balance
sheets
as
of
December
31,
2015
and
2014.







Future
minimum
lease
payments
under
non-cancelable
operating
leases
as
of
December
31,
2015
are
as
follows
(in
thousands
of
dollars):







The
Company
recognizes
rent
expense
on
a
straight-line
basis
over
the
non-cancelable
lease
period.
Facilities
rent
expense
was
$1.9
million,
$852,000
and$840,000
for
the
years
ended
December
31,
2015,
2014
and
2013,
respectively.
Until
the
new
South
San
Francisco
facility
is
utilized,
rent
of
approximately$500,000
per
quarter
will
be
charged
to
general
and
administrative
expense.Supplies Purchase Commitments







The
Company
had
non-cancelable
purchase
commitments
with
two
suppliers
to
purchase
a
minimum
quantity
of
supplies
for
approximately
$837,000
atDecember
31,
2015.Debt Obligations







See
Note
8,
Debt.Contingencies







From
time
to
time,
the
Company
may
be
involved
in
legal
proceedings
arising
in
the
ordinary
course
of
business.
The
Company
believes
there
is
no
litigationpending
that
could
have,
individually
or
in
the
aggregate,
a
material
adverse
effect
on
the
financial
position,
results
of
operations
or
cash
flows.109Year
Ending
December
31,
Amounts
2016
$1,821
2017

2,143
2018

2,102
2019

2,026
2020

2,082
Thereafter

11,956
Total
minimum
lease
payments
$22,130
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)8.
Debt







In
June
2013,
the
Company
entered
into
a
loan
and
security
agreement
("Original
Loan")
with
a
financial
institution.
The
Original
Loan
provided
for
termloans
of
up
to
$10.0
million
in
aggregate.
The
Company
drew
down
$5.0
million
in
funds
under
the
agreement
in
June
2013,
and
did
not
draw
the
remaining$5.0
million
on
or
before
the
expiration
date
of
March
31,
2014.
The
Company
was
required
to
repay
the
outstanding
principal
in
30
equal
installments
beginning18
months
after
the
date
of
the
borrowing
and
was
due
in
full
in
June
2017.
The
Original
Loan
had
an
interest
rate
of
6.06%
per
annum,
carried
prepaymentpenalties
of
2.25%
and
1.50%
for
prepayment
within
one
and
two
years,
respectively,
and
0.75%
thereafter.







In
December
2014,
the
Company
amended
certain
terms
and
conditions
of
the
Original
Loan
("Amended
Loan").
The
Amended
Loan
provides
for
term
loansof
up
to
$15.0
million
in
aggregate,
in
three
tranches
of
$5.0
million
each.
The
Company
borrowed
$5.0
million
under
the
first
tranche
in
December
2014
and
usedthe
funds
for
repayment
of
the
$5.0
million
in
principal
outstanding
under
the
Original
Loan,
in
a
cashless
transaction.
In
addition,
the
Company
paid
the
accruedbut
unpaid
interest
of
$14,000
due
on
the
Original
Loan
and
the
related
end-of-term
payment
of
$110,000.
The
Amended
Loan
waived
the
prepayment
premium
of$75,000
under
the
Original
Loan
and
reduced
the
end-of-term
payment
of
$225,000
under
the
Original
Loan
to
$110,000.
In
November
2015,
the
Company
furtheramended
the
loan
to
extend
the
availability
of
the
second
$5.0
million
tranche
under
the
Amended
Loan
through
June
30,
2016
from
December
31,
2015
originally.The
Company
may
borrow
the
third
$5.0
million
tranche
any
time
through
June
30,
2016
after
achieving
the
third
tranche
revenue
milestone
as
defined
in
theAmended
Loan.







The
carrying
value
of
the
debt
approximates
its
fair
value
because
the
interest
rate
approximates
market
rates
that
the
Company
could
obtain
for
debt
withsimilar
terms.
Under
the
Amended
Loan
borrowing,
the
Company
is
required
to
repay
the
outstanding
principal
in
24
equal
installments
beginning
24
months
afterthe
date
of
the
borrowing
and
is
due
in
full
in
December
2018.
The
first
tranche
of
the
Amended
Loan
bears
interest
at
a
rate
of
5.00%
per
annum.
The
AmendedLoan
carries
prepayment
penalties
of
2.00%
and
1.00%
for
prepayment
within
one
and
two
years,
respectively,
and
no
prepayment
penalty
thereafter.
Inconnection
with
the
Amended
Loan,
the
Company
paid
approximately
$45,000
in
third-party
fees.







The
Amended
Loan
resulted
in
a
debt
modification
under
ASC
470-50,
Modifications and Extinguishments, as
the
change
in
present
value
of
the
remainingcash
flows
associated
with
the
Original
Loan
and
Amended
Loan
are
not
substantial.







As
of
December
31,
2015
and
2014,
the
net
debt
obligation
was
as
follows
(in
thousands
of
dollars):110


December
31,



2015
2014
Debt
and
unpaid
accrued
end-of-term
payment
$5,082
$5,003
Unamortized
note
discount

(54)
(80)Net
debt
obligation
$5,028
$4,923
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)8.
Debt
(Continued)







Future
principal
payments
under
the
Amended
Loan
are
as
follows
(in
thousands
of
dollars):







The
obligation
at
December
31,
2015
includes
$82,000
of
an
end-of-term
payment
of
$237,500,
representing
4.75%
of
the
total
outstanding
principal
balance,which
accretes
over
the
life
of
the
loan
as
interest
expense.
As
a
result
of
the
debt
discount
and
the
end-of-term
payment,
the
effective
interest
rate
for
the
loandiffers
from
the
contractual
rate.







Interest
expense
on
the
debt
was
as
follows
(in
thousands
of
dollars):







Upon
execution
of
the
Original
Loan,
the
Company
issued
the
financial
institution
a
warrant
to
purchase
shares
of
Series
C
convertible
preferred
stock
at$7.56
per
share.
At
the
time
of
issuance,
the
aggregate
fair
value
of
the
warrant
for
the
24,801
shares
exercisable
under
the
warrant
was
$175,000.
The
fair
value
ofthe
warrant
was
deducted
from
total
proceeds,
resulting
in
a
debt
discount
to
be
amortized
to
interest
expense
over
48
months,
through
the
maturity
date
of
theOriginal
Loan,
using
the
effective
interest
rate
method,
and
was
recorded
as
a
preferred
stock
warrant
liability.
The
warrant
was
converted
to
a
warrant
to
purchasethe
Company's
common
stock
upon
the
completion
of
the
Company's
IPO.
See
Note
9.







The
Company's
obligations
under
the
Amended
Loan
are
secured
by
a
security
interest
in
substantially
all
of
its
assets,
excluding
its
intellectual
property
andcertain
other
assets.
The
Amended
Loan
contains
customary
conditions
related
to
borrowing,
events
of
default,
and
covenants,
including
covenants
limiting
theCompany's
ability
to
dispose
of
assets,
undergo
a
change
in
control,
merge
with
or
acquire
other
entities,
incur
debt,
incur
liens,
pay
dividends
or
otherdistributions
to
holders
of
its
capital
stock,
repurchase
stock
and
make
investments,
in
each
case
subject
to
certain
exceptions.
The
Amended
Loan
also
allows
thelender
to
call
the
debt
in
the
event
there
is
a
material
adverse
change
in
the
Company's
business
or
financial
condition.
The
Company
is
required
to
be
incompliance
with
a
minimum
liquidity
or
minimum
revenue
covenant.
As
of
December
31,
2015,
the
Company
was
in
compliance
with
the
financial
covenants.111Year
ending
December
31:



2016
$—
2017

2,437
2018

2,563
Total
$5,000



Year
Ended
December
31,



2015
2014
2013
Nominal
interest
$253
$296
$158
Amortization
of
debt
discount
and
debt
issuance
costs

46

62

33
End-of-term
payment
interest

79

81

42
Total
$378
$439
$233
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)9.
Convertible
Preferred
Stock
Warrant







In
June
2013,
in
conjunction
with
the
execution
of
the
Original
Loan,
as
discussed
in
Note
8,
the
Company
issued
to
the
lender
a
warrant
to
purchase
up
to49,602
shares
of
Series
C
convertible
preferred
stock
with
an
exercise
price
of
$7.56
per
share.
Upon
the
draw-down
of
the
$5.0
million
term
loan,
the
relatedwarrant
became
exercisable
for
24,801
shares.
In
November
2013,
in
connection
with
the
Company's
IPO,
the
warrant
automatically
became
exercisable
for
24,801shares
at
an
exercise
price
of
$7.56
per
share.
The
lender
exercised
the
warrant
with
respect
to
24,801
shares
through
a
cashless
exercise
in
March
2014,
resultingin
the
issuance
of
13,739
shares
of
the
Company's
common
stock.
The
fair
value
of
the
then
currently
exercisable
portion
of
the
warrant
in
the
amount
of
$175,000was
recorded
as
a
preferred
stock
warrant
liability
upon
issuance
and
was
subject
to
re-measurement
at
each
reporting
period
up
to
the
closing
date
of
the
IPOwhen
the
Series
C
preferred
stock
converted
into
common
stock.
The
fair
value
of
the
warrant
upon
issuance
was
calculated
using
the
Black-Scholes
option-pricingmodel
with
the
following
assumptions:
Series
C
preferred
stock
value
of
$2.40
per
share,
contractual
term
of
7.3
years,
risk-free
interest
rate
of
2.1%,
expectedvolatility
of
73.7%,
and
expected
dividend
yield
of
0%.
Just
prior
to
the
closing
of
the
IPO,
the
fair
value
of
the
warrant
was
approximately
$261,000,
and
wascalculated
using
the
Black-Scholes
option-pricing
model
with
the
following
assumptions:
Series
C
preferred
stock
value
of
$13.14
per
share,
contractual
term
of7.0
years,
risk-free
interest
rate
of
2.0%,
expected
volatility
of
81.4%,
and
expected
dividend
yield
of
0%.
The
change
in
the
fair
value
of
approximately
$86,000was
reported
as
an
expense
for
the
year
ended
December
31,
2013
and
was
included
in
other
income
(expense),
net,
in
the
statements
of
operations
andcomprehensive
loss.
The
warrant
was
converted
into
a
warrant
to
purchase
common
stock
upon
the
completion
of
the
IPO
in
2013,
and
was
reclassified
toadditional
paid-in-capital
on
the
Company's
balance
sheet.10.
Convertible
Preferred
Stock







In
November
2012,
the
Company
recorded
a
preferred
stock
liability
as
the
investors
received
the
right
to
purchase
from
the
Company,
on
the
same
terms,additional
shares
of
Series
C
convertible
preferred
stock,
in
a
second
tranche.
As
the
investors
held
a
majority
of
the
board
seats,
the
decision
to
complete
thesecond
tranche
was
deemed
to
be
outside
the
control
of
the
Company.
The
preferred
stock
liability
was
valued
using
the
option-pricing
method
with
the
followingassumptions:
100%
probability
of
success
of
the
second
tranche,
fair
value
of
Series
C
preferred
stock
of
$1.78,
a
term
of
0.67
years
and
expected
volatility
of44%.
This
resulted
in
an
initial
fair
value
of
$0.9
million
for
the
Company's
obligation
to
sell
the
convertible
preferred
stock.
At
December
31,
2012,
the
Companyrevalued
the
preferred
stock
liability
to
$0.6
million,
and
recorded
the
$0.3
million
valuation
decrease
to
other
income
(expense),
net,
in
the
Company's
statementsof
operations
and
comprehensive
loss.
In
June
2013,
the
Company
revalued
the
preferred
stock
liability
to
$2.7
million
and
recorded
the
$2.1
million
valuationincrease
to
other
income
(expense),
net,
in
the
Company's
statements
of
operations
and
comprehensive
loss.
In
June
2013,
the
$2.7
million
liability
was
settledupon
the
issuance
of
the
second
tranche
of
Series
C
convertible
preferred
stock
and
was
reclassified
to
additional
paid-in-capital
in
the
Company's
balance
sheets.







On
November
4,
2013,
the
Company
completed
its
IPO.
In
connection
with
the
IPO,
59,989,268
outstanding
shares
of
convertible
preferred
stock
wereautomatically
converted
into
14,997,312
shares
of
common
stock.112Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)11.
Stockholders'
EquityCommon Stock







The
Company's
Restated
Certificate
of
Incorporation
authorizes
the
Company
to
issue
125,000,000
shares
of
common
stock
with
a
par
value
of
$0.001
pershare.
The
holder
of
each
share
of
common
stock
shall
have
one
vote
for
each
share
of
stock.
The
common
stockholders
are
also
entitled
to
receive
dividendswhenever
funds
and
assets
are
legally
available
and
when
declared
by
the
Board
of
Directors,
subject
to
the
prior
rights
of
holders
of
all
series
of
convertiblepreferred
stock
outstanding.
No
dividends
have
been
declared
as
of
December
31,
2015.







As
of
December
31,
2015
and
2014,
the
Company
had
reserved
shares
of
common
stock
for
issuance
as
follows:







In
April
2015,
the
Company
completed
a
private
placement
of
4,907,975
shares
of
its
common
stock
to
certain
accredited
investors
(the
"Investors")
at
apurchase
price
of
$8.15
per
share.
Gross
proceeds
to
the
Company
were
$40.0
million
and
the
Company
received
$37.3
million
in
net
proceeds,
after
deductingplacement
agent
fees
and
other
expenses
payable
by
the
Company
of
$2.7
million.Employee Stock Purchase Plan







In
May
2015,
the
Company's
stockholders
approved
the
Company's
Employee
Stock
Purchase
Plan
("ESPP").
The
ESPP
provides
eligible
employees
with
anopportunity
to
purchase
common
stock
from
the
Company
and
to
pay
for
their
purchases
through
payroll
deductions.
The
ESPP
will
be
implemented
through
aseries
of
offerings
of
purchase
rights
to
eligible
employees.
Under
the
ESPP,
the
Compensation
Committee
of
the
Company's
Board
of
Directors
may
specifyofferings
with
a
duration
of
not
more
than
12
months,
and
may
specify
shorter
purchase
periods
within
each
offering.
During
each
purchase
period,
payrolldeductions
will
accumulate,
without
interest.
On
the
last
day
of
the
purchase
period,
accumulated
payroll
deductions
will
be
used
to
purchase
common
stock
foremployees
participating
in
the
offering.







The
purchase
price
will
be
specified
pursuant
to
the
offering,
but
cannot,
under
the
terms
of
the
ESPP,
be
less
than
85%
of
the
fair
market
value
per
share
ofthe
Company's
common
stock
on
either
the
offering
date
or
on
the
purchase
date,
whichever
is
less.







The
Company's
Board
of
Directors
has
determined
that
the
purchase
periods
initially
shall
have
a
duration
of
six
months,
that
the
first
purchase
period
beganon
August
3,
2015
and
that
the
purchase
price
will
be
85%
of
the
fair
market
value
per
share
of
the
Company's
common
stock
on
either
the
offering
date
or
thepurchase
date,
whichever
is
less.
The
length
of
the
purchase
period
applicable
to
U.S.
employees
and
the
purchase
price
may
not
be
changed
without
the
approvalof
the
independent
members
of
the
Compensation
Committee
of
the
Company's
Board
of
Directors.
The
Compensation
Committee
has
determined
that
if
the
fairmarket
value
of
a
share
of
the
Company's
common
stock
on
any
purchase
date113


December
31,



2015
2014
Options
issued
and
outstanding

4,179,521

3,249,469
Options
available
for
grant
under
stock
option
plans

1,058,359

1,341,252
Common
Stock
available
for
the
Employee
Stock
Purchase
Plan

750,000

—
Total

5,987,880

4,590,721
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)11.
Stockholders'
Equity
(Continued)within
a
particular
offering
period
is
less
than
the
fair
market
value
on
the
start
date
of
that
offering
period,
then
the
offering
period
will
automatically
terminateand
the
employees
in
that
offering
period
will
automatically
be
transferred
and
enrolled
in
a
new
offering
period
which
will
begin
on
the
next
day
following
suchpurchase
date.







No
employee
may
purchase
more
than
2,500
shares,
or
such
lesser
number
of
shares
as
may
be
determined
by
the
Compensation
Committee
with
respect
to
asingle
offering
period,
or
purchase
period,
if
applicable.
In
addition,
no
employee
is
permitted
to
accrue,
under
the
ESPP,
a
right
to
purchase
stock
of
the
Companyhaving
a
value
in
excess
of
$25,000
of
the
fair
market
value
of
such
stock
(determined
at
the
time
the
right
is
granted)
for
each
calendar
year.







Stock
compensation
expense
of
$190,000
was
recorded
associated
with
the
ESPP
for
the
year
ended
December
31,
2015.







The
estimated
grant
date
fair
value
of
the
ESPP
shares
was
calculated
using
the
Black-Scholes
option-pricing
model,
based
on
the
following
assumptions:12.
Stock
Incentive
PlansStock Option Plans







In
February
2008,
the
Company
adopted
the
2008
Stock
Plan
(the
"2008
Plan").
The
2008
Plan
provides
for
the
granting
of
options
to
purchase
common
stockand
common
stock
to
employees,
directors
and
consultants
of
the
Company.
The
Company
may
grant
incentive
stock
options
("ISOs"),
non-statutory
stock
options("NSOs")
or
restricted
stock
under
the
2008
Plan.
ISOs
may
only
be
granted
to
Company
employees
(including
directors
who
are
also
considered
employees).NSOs
and
restricted
stock
may
be
granted
to
Company
employees,
directors
and
consultants.
Options
may
be
granted
for
terms
of
up
to
ten
years
from
the
date
ofgrant,
as
determined
by
the
Board
of
Directors,
provided
however,
that
with
respect
to
an
ISO
granted
to
a
person
who
owns
stock
representing
more
than
10%
ofthe
voting
power
of
all
classes
of
stock
of
the
Company,
the
term
shall
be
for
no
more
than
five
years
from
the
date
of
grant.
The
exercise
price
of
options
grantedmust
be
at
a
price
no
less
than
100%
of
the
estimated
fair
value
of
the
shares
on
the
date
of
grant,
as
determined
by
the
Board
of
Directors,
provided
however,
thatwith
respect
to
an
ISO
granted
to
an
employee
who
at
the
time
of
grant
of
such
option
owns
stock
representing
more
than
10%
of
the
voting
power
of
all
classes
ofstock
of
the
Company,
the
exercise
price
shall
not
be
less
than
110%
of
the
estimated
fair
value
of
the
shares
on
the
date
of
grant.
Options
granted
to
newly
hiredemployees
generally
vest
over
four
years
(generally
25%
after
one
year
and
monthly
thereafter).
Options
granted
to
employees
as
part
of
their
annual
bonuscompensation
are
generally
fully
vested
at
the
grant
date.







In
October
2013,
the
Company
adopted
the
2013
Stock
Incentive
Plan
(the
"2013
Plan").
The
2013
Plan
was
subsequently
approved
by
the
Company'sstockholders
and
became
effective
on
November
4,114


December
31,
2015Weighted-average
volatility
53.57
-
58.10%Weighted-average
expected
term
(years)
0.49
-
0.99Risk-free
interest
rate
0.17
-
0.33%Expected
dividend
yield
—Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)12.
Stock
Incentive
Plans
(Continued)2013,
immediately
before
the
closing
of
the
Company's
IPO.
Following
the
effectiveness
of
the
2013
Plan,
no
additional
options
will
be
granted
under
the
2008Plan.
An
aggregate
of
1,700,000
shares
were
initially
reserved
for
issuance
under
the
2013
Plan.
In
addition,
to
the
extent
that
any
awards
outstanding
or
subject
tovesting
restrictions
under
the
2008
Plan
are
subsequently
forfeited
or
terminated
for
any
reason
before
being
exercised
or
settled,
the
shares
of
common
stockreserved
for
issuance
pursuant
to
such
awards
as
of
the
closing
of
the
IPO
will
become
available
for
issuance
under
the
2013
Plan.
The
remaining
shares
availablefor
grant
under
the
2008
Plan
became
available
for
issuance
under
the
2013
Plan
upon
the
closing
of
the
IPO.
On
the
first
day
of
each
year
from
2014
to
2023,
the2013
Plan
authorizes
an
annual
increase
of
the
lesser
of
4%
of
outstanding
shares
on
the
last
day
of
the
immediately
preceding
fiscal
year
or
a
lesser
amount
asdetermined
by
the
Company's
Board
of
Directors.
As
of
December
31,
2015,
1,058,359
shares
were
available
for
future
issuance
under
the
2013
Plan.







Pursuant
to
the
2013
Plan,
stock
options,
restricted
shares,
stock
units,
including
restricted
stock
units
and
stock
appreciation
rights
may
be
granted
toemployees,
consultants,
and
outside
directors
of
the
Company.
Options
granted
may
be
either
ISOs
or
NSOs.







Stock
options
are
governed
by
stock
option
agreements
between
the
Company
and
recipients
of
stock
options.
ISOs
and
NSOs
may
be
granted
under
the
2013Plan
at
an
exercise
price
of
not
less
than
100%
of
the
fair
market
value
of
the
common
stock
on
the
date
of
grant,
determined
by
the
Compensation
Committee
ofthe
Board
of
Directors.
Options
become
exercisable
and
expire
as
determined
by
the
Compensation
Committee,
provided
that
the
term
of
ISOs
may
not
exceed
tenyears
from
the
date
of
grant.
Stock
option
agreements
may
provide
for
accelerated
exercisability
in
the
event
of
an
optionee's
death,
disability,
or
retirement
orother
events.







Any
outside
director
who
was
not
previously
an
employee
and
who
first
joins
the
Company's
Board
of
Directors
on
or
after
the
effective
date
of
the
2013
Planwill
be
automatically
granted
an
initial
NSO
to
purchase
35,000
shares
of
common
stock
upon
first
becoming
a
member
of
the
Board
of
Directors.
Twenty-fivepercent
of
the
shares
subject
to
the
initial
option
will
vest
and
become
exercisable
on
the
first
anniversary
of
the
date
of
grant.
The
balance
(
i.e., 
the
remaining75%)
will
vest
and
become
exercisable
over
three
years
in
equal
monthly
installments.
On
the
first
business
day
after
each
regularly
scheduled
annual
meeting
ofstockholders,
each
outside
director
who
was
not
elected
to
the
Board
of
Directors
for
the
first
time
at
such
meeting
and
who
will
continue
serving
as
a
member
ofthe
Board
of
Directors
thereafter
will
be
automatically
granted
an
option
to
purchase
10,000
shares
of
common
stock,
provided
that
the
outside
director
has
servedon
the
Board
of
Directors
for
at
least
six
months.
Each
annual
option
will
vest
and
become
exercisable
on
the
first
anniversary
of
the
date
of
grant,
or
immediatelyprior
to
the
next
regular
annual
meeting
of
the
Company's
stockholders
following
the
date
of
grant
if
the
meeting
occurs
prior
to
the
first
anniversary
date.
Theoptions
granted
to
outside
directors
will
have
a
per
share
exercise
price
equal
to
100%
of
the
fair
market
value
of
the
underlying
shares
on
the
date
of
grant
and
willbecome
fully
vested
in
the
event
of
a
change
of
control.
In
addition,
such
options
will
terminate
on
the
earlier
of
(i)
the
day
before
the
10th
anniversary
of
the
dateof
grant
or
(ii)
the
date
12
months
after
the
termination
of
the
outside
director's
service
for
any
reason.115Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)12.
Stock
Incentive
Plans
(Continued)







The
following
table
summarizes
activity
under
the
Company's
stock
option
plans
(aggregate
intrinsic
value
in
thousands):







The
aggregate
intrinsic
value
was
calculated
as
the
difference
between
the
exercise
price
of
the
options
to
purchase
common
stock
and
the
fair
market
value
ofthe
Company's
common
stock,
which
was
$7.20
and
$9.66
per
share
as
of
December
31,
2015
and
2014,
respectively.







The
weighted
average
fair
value
of
options
to
purchase
common
stock
granted
was
$5.12,
$9.08
and
$4.19
for
the
years
ended
December
31,
2015,
2014
and2013,
respectively.







The
weighted
average
fair
value
of
stock
options
vested
was
$7.01,
$3.07
and
$2.12
per
share
for
the
years
ended
December
31,
2015,
2014
and
2013,respectively.
The
aggregate
estimated
grant
date
fair
value
of
employee
options
to
purchase
common
stock
vested
during
the
years
ended
December
31,
2015
and2014
was
$5.3
million
and
$1.6
million,
respectively.







The
weighted-average
fair
value
of
stock
options
exercised
was
$2.00
and
$1.18
for
the
years
ended
December
31,
2015
and
2014,
respectively.
The
intrinsicvalue
of
stock
options
exercised
was
$1.8
million,
$3.2
million
and
$4.9
million
for
the
years
ended
December
31,
2015,
2014
and
2013,
respectively.Stock-based Compensation







The
following
table
summarizes
stock-based
compensation
expense
related
to
stock
options
for
the
years
ended
December
31,
2015,
2014
and
2013,
and
areincluded
in
the
statements
of
operations
and
comprehensive
loss
as
follows
(in
thousands
of
dollars):116


Shares
Available
for
Grant
Stock
Options
Outstanding
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
(Years)
Aggregate
Intrinsic
Value
Balance—December
31,
2014

1,341,252

3,249,469
$7.59

7.88
$12,400
Additional
options
authorized

900,946

—









Granted

(1,521,025)
1,521,025

8.72






Canceled

337,186

(337,186)
10.74






Exercised

—

(253,787)
2.85






Balance—December
31,
2015

1,058,359

4,179,521
$8.03

7.50
$6,511
Options
vested
and
exercisable—December
31,2015




1,945,279
$6.14

5.96
$5,801
Options
vested
and
expected
to
vest—December
31,
2015




4,179,499
$8.03

7.50
$6,511



Year
Ended
December
31,



2015
2014
2013
Cost
of
revenue
$100
$51
$34
Research
and
development

1,178

790

250
Selling
and
marketing

1,326

707

169
General
and
administrative

2,998

2,000

794
Total
stock-based
compensation
expense
$5,602
$3,548
$1,247
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)12.
Stock
Incentive
Plans
(Continued)







As
of
December
31,
2015,
the
Company
had
$10.6
million
of
unrecognized
compensation
expense
related
to
unvested
stock
options,
which
is
expected
to
berecognized
over
an
estimated
weighted-average
period
of
2.70
years.







The
estimated
grant-date
fair
value
of
employee
stock
options
was
calculated
using
the
Black-Scholes
option-pricing
model,
based
on
the
followingassumptions:







The
estimated
fair
value
of
non-employee
stock
options
was
calculated
using
the
Black-Scholes
option-pricing
model,
based
on
the
following
assumptions:Equity-based Compensation







In
February
2013,
the
Company's
Board
of
Directors
authorized
the
grant
of
100,498
fully
vested
stock
options
at
a
fair
value
of
$2.59
per
option,
determinedusing
the
Black-Scholes
option-pricing
valuation
model,
resulting
in
a
$259,000
expense
in
the
year
ended
December
31,
2012.
Upon
issuance
of
the
options,
theaccrued
liability
was
reclassified
into
additional
paid-in
capital.
For
the
years
ended
December
31,
2015,
2014
and
2013,
the
Company
paid
executive
bonuses
onlyin
the
form
of
cash.13.
Genzyme
Co-Promotion
Agreement







In
January
2012,
the
Company
and
Genzyme
Corporation
("Genzyme")
executed
a
co-promotion
agreement
for
the
co-exclusive
rights
and
license
to
promoteand
market
the
Company's
Afirma
thyroid
diagnostic
solution
in
the
United
States
and
in
40
named
countries.
In
exchange,
the
Company
received
a
$10.0
millionupfront
co-promotion
fee
from
Genzyme
in
February
2012.
Under
the
terms
of
the
agreement,
Genzyme
will
receive
a
percentage
of
U.S.
cash
receipts
that
theCompany
has
received
related
to
Afirma
as
co-promotion
fees.
The
percentage
was
50%
in
2012,
40%
from
January
2013
through
February
2014,
and
32%beginning
in
February
2014.
Genzyme's
obligation
to
also
spend
up
to
$500,000
for
qualifying
clinical
development
activities
in
countries
that
require
additionaltesting
for
approval
expired
in
July
2014.117


Year
Ended
December
31,


2015
2014
2013Weighted-average
volatility
52.56
-
68.82%
70.19
-
78.54%
80.42
-
81.41%Weighted-average
expected
term
(years)
5.50
-
6.08
5.50
-
6.08
5.00
-
6.08Risk-free
interest
rate
1.55
-
2.03%
1.66
-
2.04%
0.88
-
2.11%Expected
dividend
yield
—
—
—


Year
Ended
December
31,


2015
2014
2013Weighted-average
volatility
64.72
-
74.48%
73.20
-
74.48%
77.86
-
78.14%Weighted-average
expected
term
(years)
7.92
-
10.00
8.75
-
10.00
7.72
-
9.75Risk-free
interest
rate
1.78
-
2.29%
2.09
-
2.20%
2.59
-
2.99%Expected
dividend
yield
—
—
—Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)13.
Genzyme
Co-Promotion
Agreement
(Continued)







In
November
2014,
the
Company
signed
an
Amended
and
Restated
U.S.
Co-Promotion
Agreement
("Amended
Agreement")
with
Genzyme.
Under
theAmended
Agreement,
the
co-promotion
fees
Genzyme
will
receive
as
a
percentage
of
U.S.
cash
receipts
were
reduced
from
32%
to
15%
beginning
January
1,2015.
Through
August
11,
2014,
the
Company
amortized
the
$10.0
million
upfront
co-promotion
fee
straight-line
over
a
four-year
period,
which
wasmanagement's
best
estimate
of
the
life
of
the
agreement,
in
part
because
after
that
period
either
party
could
have
terminated
the
agreement
without
penalty.Effective
August
12,
2014,
the
Company
extended
the
amortization
period
from
January
2016
to
June
2016,
the
modified
earliest
period
either
party
couldterminate
the
agreement
without
penalty.
The
Company
accounted
for
the
change
in
accounting
estimate
prospectively.
The
extension
of
the
amortization
period
toJune
2016
decreased
the
loss
from
operations
and
net
loss
by
$0.6
million
and
$0.2
million
for
the
years
ended
December
31,
2015
and
2014,
respectively.
Thisextension
of
amortization
to
June
2016
also
decreased
the
loss
per
common
share
by
$0.02
and
$0.01
for
the
years
ended
December
31,
2015
and
2014,respectively.
Either
party
may
terminate
the
agreement
with
six
months
prior
notice,
however,
under
the
Amended
Agreement,
neither
party
can
terminate
theagreement
for
convenience
prior
to
June
30,
2016.
The
agreement
with
Genzyme
expires
in
2027.
See
Note
17,
Subsequent
Event.







In
February
2015,
the
Company
entered
into
an
Ex-U.S.
Co-promotion
Agreement
with
Genzyme
for
the
promotion
of
the
Afirma
GEC
test
with
exclusivityin
five
countries
outside
the
United
States
initially
and
in
other
countries
agreed
to
from
time
to
time.
The
agreement
commenced
on
January
1,
2015
and
continuesuntil
December
31,
2019,
with
extension
of
the
agreement
possible
upon
agreement
of
the
parties.
Country-specific
terms
have
been
established
under
thisagreement
for
Brazil
and
Singapore
and
a
right
of
first
negotiation
has
been
established
for
Canada,
the
Netherlands
and
Italy.
The
Company
will
pay
Genzyme25%
of
net
revenue
from
the
sale
of
the
Afirma
GEC
test
in
Brazil
and
Singapore
over
a
five-year
period
commencing
January
1,
2015.
Beginning
in
the
fourthyear
of
the
agreement,
if
the
Company
terminates
the
agreement
for
convenience,
the
Company
may
be
required
to
pay
a
termination
fee
contingent
on
the
numberof
GEC
billable
results
generated.







The
Company
incurred
$7.3
million,
$12.0
million
and
$8.6
million
in
co-promotion
expense,
excluding
the
amortization
of
the
up-front
co-promotion
fee,
inthe
years
ended
December
31,
2015,
2014
and
2013,
respectively,
and
is
included
in
selling
and
marketing
expenses
in
the
statements
of
operations
andcomprehensive
loss.
The
Company's
outstanding
obligation
to
Genzyme
totaled
$2.1
million
and
$6.0
million
at
December
31,
2015
and
December
31,
2014,respectively.
The
$2.1
million
obligation
at
December
31,
2015
is
included
in
accrued
liabilities
on
the
Company's
balance
sheets.
Of
the
$6.0
million
obligation
atDecember
31,
2014,
$2.7
million
is
included
in
accounts
payable
and
$3.3
million
is
included
in
accrued
liabilities
on
the
Company's
balance
sheets.







The
Company
amortized
$1.9
million,
$2.3
million
and
$2.5
million
of
the
$10.0
million
up-front
co-promotion
fee
in
the
years
ended
December
31,
2015,2014
and
2013,
respectively,
which
is
reflected
as
a
reduction
to
selling
and
marketing
expenses
in
the
statements
of
operations
and
comprehensive
loss.14.
Thyroid
Cytopathology
Partners







In
2010,
the
Company
entered
into
an
arrangement
with
Pathology
Resource
Consultants,
P.A.
("PRC")
to
set
up
and
manage
a
specialized
pathology
practiceto
provide
testing
services
to
the
Company.
There
is
no
direct
monetary
compensation
from
the
Company
to
PRC
as
a
result
of
this
arrangement.
The
Company'sservice
agreement
is
with
the
specialized
pathology
practice,
Thyroid
Cytopathology
Partners,118Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)14.
Thyroid
Cytopathology
Partners
(Continued)("TCP"),
and
is
effective
through
December
31,
2015,
and
thereafter
automatically
renews
every
year
unless
either
party
provides
notice
of
intent
not
to
renew
atleast
12
months
prior
to
the
end
of
the
then-current
term.
Under
the
service
agreement,
the
Company
pays
TCP
based
on
a
fixed
price
per
test
schedule,
which
isreviewed
periodically
for
changes
in
market
pricing.
Subsequent
to
December
2012,
an
amendment
to
the
service
agreement
allows
TCP
to
use
a
portion
of
theCompany's
facility
in
Austin,
Texas.
The
Company
does
not
have
an
ownership
interest
in
or
provide
any
form
of
financial
or
other
support
to
TCP.







The
Company
has
concluded
that
TCP
represents
a
variable
interest
entity
and
that
the
Company
is
not
the
primary
beneficiary
as
it
does
not
have
the
abilityto
direct
the
activities
that
most
significantly
impact
TCP's
economic
performance.
Therefore,
the
Company
does
not
consolidate
TCP.
All
amounts
paid
to
TCPunder
the
service
agreement
are
expensed
as
incurred
and
included
in
cost
of
revenue
in
the
statements
of
operations
and
comprehensive
loss.
The
Companyincurred
$4.7
million,
$4.0
million
and
$3.2
million
in
the
years
ended
December
31,
2015,
2014
and
2013,
respectively,
in
cytopathology
testing
and
evaluationservices
expenses
with
TCP.
The
Company's
outstanding
obligations
to
TCP
for
cytopathology
testing
services
were
$820,000
and
$1.1
million
as
of
December
31,2015
and
2014,
respectively,
and
are
included
in
accounts
payable
in
the
Company's
balance
sheets.







TCP
reimburses
the
Company
for
a
proportionate
share
of
the
Company's
rent
and
related
operating
expense
costs
for
the
leased
facility.
TCP's
portion
of
rentand
related
operating
expense
costs
for
the
shared
space
at
the
Austin,
Texas
facility
was
$90,000,
$86,000
and
$49,000
for
the
years
ended
December
31,
2015,2014
and
2013
and
is
included
other
income,
net
in
the
Company's
statements
of
operations
and
comprehensive
loss.15.
Income
Taxes







The
Company
generated
a
pretax
loss
of
$33.7
million,
$29.4
million
and
$25.6
million
in
the
United
States
for
the
years
ended
December
31,
2015,
2014
and2013,
respectively.
Since
inception,
the
Company
has
not
generated
any
pretax
income
or
loss
outside
of
the
United
States.
The
Company
recorded
no
provisionfor
income
taxes
during
the
year
ended
December
31,
2015,
2014
or
2013.







The
Company
follows
FASB
ASC
No.
740,
Income Taxes for the Computation and Presentation of its Tax Provision. The
following
table
presents
areconciliation
of
the
tax
expense
computed
at
the
statutory
federal
rate
and
the
Company's
tax
expense
for
the
period
presented
(in
thousands
of
dollars):







Deferred
income
taxes
reflect
the
net
tax
effects
of
temporary
differences
between
the
carrying
amounts
of
assets
and
liabilities
for
financial
reportingpurposes
and
the
amounts
used
for
income
tax119


Year
Ended
December,
31,



2015
2014
2013
U.S.
federal
taxes
at
statutory
rate
$(11,459)$(9,987)$(8,697)State
tax
(net
of
federal
benefit)

(30)
5

11
Permanent
differences

96

64

790
Incentive
stock
options

789

672

355
Tax
credits

(581)
(461)
(502)Change
in
valuation
allowance

11,185

9,707

8,043
Total
$—
$—
$—
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)15.
Income
Taxes
(Continued)purposes.
Significant
components
of
the
Company's
deferred
tax
assets
and
liabilities
are
as
follows
(in
thousands
of
dollars):







In
November
2015,
the
FASB
issued
ASU
2015-17,
Balance Sheet Classification of Deferred Taxes ,
related
to
balance
sheet
classification
of
deferred
taxes.The
ASU
requires
that
deferred
tax
assets
and
liabilities
be
classified
as
noncurrent
in
the
statement
of
financial
position,
thereby
simplifying
the
current
guidancethat
requires
an
entity
to
separate
deferred
assets
and
liabilities
into
current
and
noncurrent
amounts.
The
ASU
will
be
effective
for
the
Company
beginning
in
thefirst
quarter
of
fiscal
year
2018
though
early
adoption
is
permitted.
The
Company
has
early-adopted
the
ASU
as
of
December
31,
2015
and
its
statement
offinancial
position
as
of
this
date
reflects
the
revised
classification
of
current
deferred
tax
assets
and
liabilities
as
noncurrent.
The
Company
has
early-adopted
thisASU
prospectively
and
prior
periods
have
not
been
retrospectively
adjusted.
There
is
no
other
impact
on
the
Company's
financial
statements
of
early-adopting
theASU.







The
Company
has
established
a
full
valuation
allowance
against
its
net
deferred
tax
assets
due
to
the
uncertainty
surrounding
realization
of
such
assets.
Thevaluation
allowance
increased
$11.7
million,
$10.6
million
and
$8.1
million
during
the
years
ended
December
31,
2015,
2014
and
2013,
respectively.







As
of
December
31,
2015,
the
Company
had
net
operating
loss
carryforwards
of
approximately
$143.8
million
and
$53.8
million
available
to
reduce
futuretaxable
income,
if
any,
for
federal
and
state
income
tax
purposes,
respectively.
Of
these
amounts,
$1.6
million
represent
federal
and
state
tax
deductions
fromstock-based
compensation,
which
will
be
recorded
as
an
adjustment
to
additional
paid-in
capital
when
they
reduce
tax
payable.
The
U.S.
federal
net
operating
losscarryforwards
will
begin
to
expire
in
2026
while
for
state
purposes,
the
net
operating
losses
will
begin
to
expire
in
2016.120


Year
Ended
December
31,



2015
2014
2013
Deferred
tax
assets:









Net
operating
loss
carryforwards
$52,262

41,971

28,569
Research
and
development
credits

2,497

1,916

1,455
Stock-based
compensation

1,825

826

313
Genzyme
co-promotion
agreement

330

995

1,792
Accruals,
deferred
rent
and
other

4,698

3,381

705
Gross
deferred
tax
assets

61,612

49,089

32,834
Valuation
allowance

(55,101)
(43,439)
(32,819)Net
deferred
tax
assets

6,511

5,650

15
Deferred
tax
liabilities:









Property
and
equipment

(1,215)
(60)
(15)In-process
research
and
development

(5,296)
(5,590)
—
Gross
deferred
tax
liabilities

(6,511)
(5,650)
(15)Net
deferred
tax
liabilities

(6,511)
(5,650)
(15)Net
deferred
taxes
$—
$—
$—
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)15.
Income
Taxes
(Continued)







As
of
December
31,
2015,
the
Company
had
net
credit
carryforwards
of
approximately
$2.7
million
and
$2.1
million
available
to
reduce
future
taxableincome,
if
any,
for
federal
and
state
income
tax
purposes,
respectively.
The
federal
credit
carryforwards
begin
to
expire
in
2028.
California
credits
have
noexpiration
date.
Other
state
credit
carryforwards
begin
to
expire
in
2023.







On
December
18,
2015,
The
Consolidated
Appropriations
Act
of
2014
was
signed
into
law,
which
retroactively
reinstated
and
made
permanent
the
federalresearch
tax
credit
provisions
from
January
1,
2015
through
December
31,
2015.







The
Internal
Revenue
Code
of
1986,
as
amended,
imposes
restrictions
on
the
utilization
of
net
operating
losses
and
tax
credits
in
the
event
of
an
"ownershipchange"
of
a
corporation.
Accordingly,
a
company's
ability
to
use
net
operating
losses
and
tax
credits
may
be
limited
as
prescribed
under
Internal
Revenue
CodeSection
382
and
383
("IRC
Section
382").
Events
which
may
cause
limitations
in
the
amount
of
the
net
operating
losses
or
tax
credits
that
the
Company
may
use
inany
one
year
include,
but
are
not
limited
to,
a
cumulative
ownership
change
of
more
than
50%
over
a
three-year
period.
Utilization
of
the
federal
and
state
netoperating
losses
may
be
subject
to
substantial
annual
limitation
due
to
the
ownership
change
limitations
provided
by
the
IRC
Section
382
rules
and
similar
stateprovisions.
In
the
event
the
Company
has
any
changes
in
ownership,
net
operating
losses
and
research
and
development
credit
carryovers
could
be
limited
and
mayexpire
unutilized.Uncertain Tax Positions







As
of
December
31,
2015,
the
Company
had
unrecognized
tax
benefits
of
$1.9
million,
none
of
which
would
currently
affect
the
Company's
effective
tax
rateif
recognized
due
to
the
Company's
deferred
tax
assets
being
fully
offset
by
a
valuation
allowance.
The
Company
does
not
anticipate
that
the
amount
ofunrecognized
tax
benefits
relating
to
tax
positions
existing
at
December
31,
2015
will
significantly
increase
or
decrease
within
the
next
12
months.







A
reconciliation
of
the
beginning
and
ending
amount
of
unrecognized
tax
benefits
is
as
follows
(in
thousands
of
dollars):







It
is
the
Company's
policy
to
include
penalties
and
interest
expense
related
to
income
taxes
as
a
component
of
other
income
(expense),
net,
and
interestexpense,
respectively,
as
necessary.
There
was
no
interest
expense
or
penalties
related
to
unrecognized
tax
benefits
recorded
through
December
31,
2015.







The
Company's
major
tax
jurisdictions
are
the
United
States
and
California.
All
of
the
Company's
tax
years
will
remain
open
for
examination
by
the
Federaland
state
tax
authorities
for
three
and
four
years,121


Year
Ended
December
31,



2015
2014
2013
Unrecognized
tax
benefits,
beginning
of
period
$1,571
$727
$481
Gross
increases—tax
position
in
prior
period

—

548

68
Gross
decreases—tax
position
in
prior
period

—

—

—
Gross
increases—current
period
tax
position

300

296

178
Lapse
of
statue
of
limitations

—

—

—
Unrecognized
tax
benefits,
end
of
period
$1,871
$1,571
$727
Table
of
ContentsVERACYTE,
INC.Notes
to
Financial
Statements
(Continued)15.
Income
Taxes
(Continued)respectively,
from
the
date
of
utilization
of
the
net
operating
loss
or
research
and
development
credit.
The
Company
does
not
have
any
tax
audits
pending.16.
401(k)
Plan







The
Company
sponsors
a
401(k)
defined
contribution
plan
covering
all
employees.
Employer
contributions
to
the
plan
were
$103,000
for
the
year
endedDecember
31,
2015.
There
were
no
employer
contributions
to
the
plan
in
the
years
ended
December
31,
2014
and
2013.17.
Subsequent
Event







On
March
9,
2016,
the
Company
gave
Genzyme
notice
of
termination
of
the
Amended
Agreement
effective
September
9,
2016.
There
is
no
impact
to
theCompany's
financial
statements
as
of
December
31,
2015
as
a
result
of
this
notice
of
termination.18.
Selected
Quarterly
Financial
Data
(Unaudited)







The
following
table
presents
selected
unaudited
financial
data
for
each
of
the
eight
quarters
in
the
two-year
period
ended
December
31,
2015.
The
Companybelieves
this
information
reflects
all
recurring
adjustments
necessary
to
fairly
present
this
information
when
read
in
conjunction
with
the
Company's
financialstatements
and
the
related
notes.
Net
loss
per
common
share,
basic
and
diluted,
for
the
four
quarters
of
each
fiscal
year
may
not
sum
to
the
total
for
the
fiscal
yearbecause
of
the
different
number
of
shares
outstanding
during
each
period.
The
results
of
operations
for
any
quarter
are
not
necessarily
indicative
of
the
results
to
beexpected
for
any
future
period
(in
thousands
of
dollars,
except
for
share
and
per
share
data):122Quarter
Ended
March
31
June
30
September
30
December
31
2015:












Total
revenues
$11,218
$11,908
$12,335
$14,042
Net
loss

(7,610)
(9,136)
(8,945)
(8,013)Net
loss
per
common
share,
basic
and
diluted

(0.34)
(0.35)
(0.32)
(0.29)Shares
used
to
compute
net
loss
per
common
share,
basic
anddiluted

22,539,723

26,048,934

27,640,806

27,672,806
2014:












Total
revenues
$7,476
$8,677
$9,838
$12,199
Net
loss

(6,674)
(6,655)
(7,902)
(8,142)Net
loss
per
common
share,
basic
and
diluted

(0.32)
(0.31)
(0.37)
(0.36)Shares
used
to
compute
net
loss
per
common
share,
basic
anddiluted

21,148,342

21,237,196

21,648,660

22,508,250
Table
of
ContentsITEM
9.



CHANGES
IN
AND
DISAGREEMENTS
WITH
ACCOUNTANTS
ON
ACCOUNTING
AND
FINANCIAL
DISCLOSURE








Not
applicable.ITEM
9A.



CONTROLS
AND
PROCEDURES
Evaluation
of
Disclosure
Controls
and
Procedures







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







Based
on
their
evaluation
as
of
the
end
of
the
period
covered
by
this
Annual
Report
on
Form
10-K,
our
Chief
Executive
Officer
and
Chief
Financial
Officerhave
concluded
that,
as
of
such
date,
our
disclosure
controls
and
procedures
were
effective
at
the
reasonable
assurance
level.Management's
Annual
Report
on
Internal
Control
Over
Financial
Reporting







Our
management
is
responsible
for
establishing
and
maintaining
adequate
internal
control
over
financial
reporting
as
defined
in
Rule
13a-15(f)
under
theExchange
Act.
Because
of
its
inherent
limitations,
internal
control
over
financial
reporting
may
not
prevent
or
detect
misstatements.
Projections
of
any
evaluationof
the
effectiveness
of
internal
control
to
future
periods
are
subject
to
the
risk
that
controls
may
become
inadequate
because
of
changes
in
conditions,
or
that
thedegree
of
compliance
with
policies
or
procedures
may
deteriorate.
Under
the
supervision
and
with
the
participation
of
our
management,
including
our
ChiefExecutive
Officer
and
Chief
Financial
Officer,
we
conducted
an
evaluation
of
the
effectiveness
of
our
internal
control
over
financial
reporting
as
of
December
31,2015
using
the
criteria
established
in
Internal Control Integrated Framework ("2013
Framework")
issued
by
the
Committee
of
Sponsoring
Organizations
of
theTreadway
Commission
("COSO").







Based
on
our
evaluation
using
those
criteria,
our
management
has
concluded
that,
as
of
December
31,
2015,
our
internal
control
over
financial
reporting
waseffective
to
provide
reasonable
assurance
regarding
the
reliability
of
financial
reporting
and
the
preparation
of
financial
statements
for
external
purposes
inaccordance
with
generally
accepted
accounting
principles.







This
Annual
Report
on
Form
10-K
does
not
include
an
attestation
report
of
our
registered
public
accounting
firm
on
our
internal
control
over
financialreporting
due
to
an
exemption
established
by
the
JOBS
Act
for
"emerging
growth
companies."123Table
of
ContentsChanges
in
Internal
Control
over
Financial
Reporting







There
were
no
changes
in
our
internal
control
over
financial
reporting
(as
such
term
is
defined
in
Rule
13a-15(f)
under
the
Exchange
Act)
identified
inconnection
with
the
evaluation
identified
above
that
occurred
during
the
quarter
ended
December
31,
2015
that
have
materially
affected,
or
are
reasonably
likely
tomaterially
affect,
our
internal
control
over
financial
reporting.ITEM
9B.



OTHER
INFORMATION








On
March
9,
2016,
we
gave
Genzyme
Corporation
notice
of
termination
of
that
certain
Amended
and
Restated
U.S.
Co-Promotion
Agreement,
effectiveSeptember
9,
2016.
Pursuant
to
the
Agreement,
Genzyme
paid
us
a
$10.0
million
upfront
fee
and
we
are
required
to
pay
Genzyme
a
co-promotion
fee
that
is
equalto
a
percentage
of
our
U.S.
cash
receipts
from
the
sale
of
the
Afirma
GEC
test,
which
fee
has
varied
over
time.
We
record
the
Genzyme
co-promotion
fees,
net
ofamortization
related
to
the
upfront
fee,
within
selling
and
marketing
expense
in
our
statements
of
operations.
The
co-promotion
fees
payable
to
Genzyme
as
apercentage
of
U.S.
cash
receipts
from
the
sale
of
the
Afirma
GEC
test
are
currently
15%.124Table
of
ContentsPART
III
ITEM
10.



DIRECTORS,
EXECUTIVE
OFFICERS
AND
CORPORATE
GOVERNANCE








Names
of
members
of
the
board
of
directors
and
certain
biographical
information
as
of
February
29,
2016
are
set
forth
below:







Bonnie
H.
Anderson
has
served
as
our
Chief
Executive
Officer
and
as
a
member
of
our
board
of
directors
since
February
2008.
In
August
2013,
she
wasappointed
as
our
President.
Prior
to
joining
us,
Ms.
Anderson
was
an
independent
strategic
consultant
from
April
2006
to
January
2008,
including
as
a
strategicconsultant
for
us
from
July
2007
to
January
2008.
Ms.
Anderson
was
a
Vice
President
at
Beckman
Coulter,
Inc.,
a
manufacturer
of
biomedical
testing
instrumentsystems,
tests
and
supplies,
from
September
2000
to
March
2006.
She
currently
serves
as
a
trustee
emeritus
of
the
Keck
Graduate
Institute
of
Applied
LifeSciences.
Ms.
Anderson
holds
a
B.S.
in
Medical
Technology
from
Indiana
University
of
Pennsylvania.







Brian
G.
Atwood
has
served
as
a
Managing
Director
of
Versant
Ventures,
a
healthcare-focused
venture
capital
firm
that
he
co-founded,
since
1999.
Prior
tofounding
Versant
Ventures,
Mr.
Atwood
served
as
a
general
partner
of
Brentwood
Associates,
a
venture
capital
firm.
He
was
also
founder,
President
and
ChiefExecutive
Officer
of
Glycomed,
Inc.,
a
biopharmaceutical
company.
Mr.
Atwood
is
currently
a
director
of
Clovis
Oncology,
Inc.,
Five
Prime
Therapeutics,
Inc.and
Immune
Design
Corp.,
and
a
number
of
privately
held
companies.
Mr.
Atwood
served
as
a
director
of
Cadence
Pharmaceuticals,
Inc.
from
March
2006
untilits
acquisition
in
March
2014,
Helicos
BioSciences
Corporation
from
2003
until
September
2011,
Pharmion
Corporation
from
January
2000
until
its
acquisition
inMarch
2008,
and
Trius
Therapeutics,
Inc.
from
February
2007
until
its
acquisition
in
September
2013.
Mr.
Atwood
holds
a
B.S.
in
Biological
Sciences
from
theUniversity
of
California,
Irvine,
an
M.S.
in
Ecology
from
the
University
of
California,
Davis,
and
an
M.B.A.
from
Harvard
University.







John
L.
Bishop
has
served
as
Chief
Executive
Officer
and
as
a
director
of
Cepheid
since
April
2002
and
became
its
Chairman
of
the
Board
in
February
2013.Mr.
Bishop
served
as
President
and
a
director
of
Vysis,
Inc.,
a
genomic
disease
management
company
that
was
acquired
by
Abbott
Laboratories,
from
1993
to2002,
and
as
Chief
Executive
Officer
from
1996
to
2002.
From
1991
until
1993,
Mr.
Bishop
was
Chairman
and
Chief
Executive
Officer
of
MicroProbeCorporation,
a
biotechnology
company,
and,
from
1987
until
1991,
of
Source
Scientific
Systems,
a
biomedical
instrument
manufacturing
company.
From
1984
to1986,
Mr.
Bishop
was
President
and
Chief
Operating
Officer
of
Gen-Probe,
Inc.
From
1968
to
1984,
Mr.
Bishop
held
various
management
positions
withAmerican
Hospital
Supply
Company
and
its
affiliates,
including
a
three-year
assignment
in
Japan
as
an
Executive
Vice
President
and
Chief
Executive
Officer
ofInternational
Reagents
Corp.,
a
joint
venture
between
American
Hospital
Supply
Company
and
Green
Cross
Corporation.
He
served
as
a
director
ofConceptus,
Inc.
and
a
member
of
its
compensation
committee
until
its
acquisition
by
Bayer
HealthCare
LLC
in
June
2013
and
is
the
chairman
of
the
board
ofdirectors
of
AdvaMedDx,
a
medical
diagnostics
industry
advocacy
group.
Mr.
Bishop
holds
a
B.S.
from
the
University
of
Miami.125Name
Age
Position
with
the
Company
Director
Since
Bonnie
H.
Anderson

58
President
and
Chief
Executive
Officer
and
Director

2008
Brian
G.
Atwood

63
Chairman
of
the
Board
of
Directors

2006
John
L.
Bishop

71
Director

2014
Fred
E.
Cohen,
M.D.,
D.Phil.


59
Director

2007
Karin
Eastham

66
Director

2012
Robert
S.
Epstein,
M.D.,
M.S.


60
Director

2015
Evan
Jones

58
Director

2008
Tina
S.
Nova
Ph.D.


62
Director

2015
Jesse
I.
Treu,
Ph.D.


68
Director

2010
Table
of
Contents







Fred
E.
Cohen,
M.D.,
D.Phil.,
is
a
partner
at
TPG,
a
private
equity
firm
he
joined
in
2001,
and
serves
as
co-head
of
TPG's
biotechnology
group.
From
1988through
December
2014,
Dr.
Cohen
was
an
Adjunct
Professor
of
Cellular
and
Molecular
Pharmacology
at
the
University
of
California,
San
Francisco.
Dr.
Cohencurrently
serves
as
a
director
of
BioCryst
Pharmaceuticals,
Inc.,
CareDx,
Inc.,
Five
Prime
Therapeutics,
Inc.,
Genomic
Health,
Inc.,
Quintiles
TransnationalHoldings
Inc.,
Roka
Bioscience,
Inc.
and
Tandem
Diabetes
Care,
Inc.,
and
a
number
of
privately
held
companies.
Dr.
Cohen
holds
a
B.S.
in
Molecular
Biophysicsand
Biochemistry
from
Yale
University,
a
D.Phil.
in
Molecular
Biophysics
from
Oxford
University
and
an
M.D.
from
Stanford
University.







Karin
Eastham
serves
on
the
boards
of
directors
of
several
life
sciences
companies.
From
May
2004
to
September
2008,
Ms.
Eastham
served
as
ExecutiveVice
President
and
Chief
Operating
Officer,
and
as
a
member
of
the
Board
of
Trustees,
of
the
Burnham
Institute
for
Medical
Research,
a
non-profit
corporationengaged
in
biomedical
research.
From
April
1999
to
May
2004,
Ms.
Eastham
served
as
Senior
Vice
President,
Chief
Financial
Officer
and
Secretary
of
DiversaCorporation,
a
biotechnology
company.
She
previously
held
similar
positions
with
CombiChem,
Inc.,
a
computational
chemistry
company,
and
Cytel
Corporation,a
biopharmaceutical
company.
Ms.
Eastham
also
held
several
positions,
including
Vice
President,
Finance,
at
Boehringer
Mannheim
Corporation,
a
diagnosticscompany,
from
1976
to
1988.
Ms.
Eastham
currently
serves
as
a
director
of
Geron
Corporation,
Illumina,
Inc.,
and
MorphoSys
AG.
Ms.
Eastham
served
as
adirector
of
Amylin
Pharmaceuticals,
Inc.
from
September
2005
until
its
acquisition
in
August
2012,
Genoptix,
Inc.
from
August
2008
until
its
acquisition
in
March2011,
Tercica,
Inc.
from
December
2003
until
its
acquisition
in
October
2008,
and
Trius
Therapeutics,
Inc.
from
February
2007
until
its
acquisition
in
September2013.
Ms.
Eastham
received
a
B.S.
in
Accounting
and
an
M.B.A.
from
Indiana
University
and
is
a
Certified
Public
Accountant.







Robert
S.
Epstein,
M.D.,
M.S.
has
served
as
a
strategic
consultant
to
life
sciences
companies
since
2013.
From
2010
to
2012,
Dr.
Epstein
served
as
Presidentof
the
Medco-UBC
Division
and
as
Chief
Research
and
Development
Officer
of
Medco
Health
Solutions,
Inc.,
a
managed
healthcare
company.
Prior
to
that,Dr.
Epstein
served
as
Medco's
Chief
Medical
Officer
from
1997
to
2010.
Dr.
Epstein
currently
serves
as
a
director
of
Fate
Therapeutics,
Inc.
and
Illumina,
Inc.Dr.
Epstein
is
the
former
president
of
the
International
Society
of
Pharmacoeconomics
and
Outcomes
Research,
and
served
on
the
board
of
directors
of
the
DrugInformation
Association
and
the
International
Soc`iety
of
Quality
of
Life.
He
has
also
served
on
the
federal
CDC
EGAPP
(Evaluation
of
Genomic
Applications
inPractice
&
Prevention)
Stakeholder
Committee
and
the
AHRQ
CERTs
(Centers
for
Education
and
Research
on
Therapeutics)
Committee.
Dr.
Epstein
holds
a
B.S.in
Biomedical
Science
and
an
M.D.
from
the
University
of
Michigan,
and
an
M.S.
in
Preventive
Medicine
from
the
University
of
Maryland.







Evan
Jones
has
served
since
2007
as
Managing
Member
of
jVen
Capital,
LLC,
a
life
sciences
investment
company.
He
also
serves
as
Chairman
and
ChiefExecutive
Officer
of
Opgen,
Inc.,
a
privately
held
genetic
analysis
company.
He
was
a
co-founder
of
Digene
Corporation,
a
publicly-traded
biotechnologycompany
focused
on
women's
health
and
molecular
diagnostic
testing,
serving
as
Chairman
of
the
Board
from
1995
until
its
acquisition
in
2007
and
serving
asChief
Executive
Officer
from
1990
to
2006
and
as
President
from
1990
to
1999.
Mr.
Jones
also
serves
as
a
director
of
Fluidigm
Corporation
and
FoundationMedicine,
Inc.
Mr.
Jones
served
as
a
director
of
CAS
Medical
Systems,
Inc.
from
May
2008
until
its
acquisition
in
October
2013.
Mr.
Jones
received
a
B.A.
inBiotechnology
from
the
University
of
Colorado
and
an
M.B.A.
from
The
Wharton
School
at
the
University
of
Pennsylvania.







Tina
S.
Nova,
Ph.D.
has
served
since
October
1,
2015
as
president
and
chief
executive
officer
of
Molecular
Stethoscope,
Inc.,
a
molecular
diagnosticscompany.
From
July
2014
to
August
2015,
Dr.
Nova
was
senior
vice
president
and
general
manager
of
Illumina
Inc.'s
oncology
business
unit.
From
March
2000
toApril
2014,
Dr.
Nova
was
a
director,
president
and
chief
executive
officer
of
Genoptix,
Inc.,
a
medical
laboratory
she
co-founded,
which
was
purchased
byNovartis
Pharmaceuticals
Corporation
in
2011.
She
has
also
held
senior
positions
with
Nanogen,
Inc.,
Ligand
Pharmaceuticals,
Inc.
and
Hybritech,
Inc.
Dr.
Novacurrently
serves
on
the
board
of
directors
of
Arena
Pharmaceuticals,
Inc.
and
is
vice
chairman
of126Table
of
Contentsthe
board
of
directors
of
the
Rady
Pediatric
Genomics
and
Systems
Medicine
Institute,
which
is
part
of
Rady
Children's
Hospital-San
Diego.
Dr.
Nova
received
aB.S.
degree
in
Biological
Sciences
from
the
University
of
California,
Irvine
and
a
Ph.D.
in
Biochemistry
from
the
University
of
California,
Riverside.







Jesse
I.
Treu,
Ph.D.,
has
been
a
partner
at
Domain
Associates,
a
venture
capital
firm,
since
its
inception
in
1985.
Dr.
Treu
has
been
a
director
of
38
early-stagehealthcare
companies,
of
which
22
have
been
public
companies.
Dr.
Treu
currently
serves
as
a
director
of
Aldeyra
Therapeutics,
Inc.
and
Tandem
DiabetesCare,
Inc.,
and
a
number
of
privately
held
life
sciences
and
biopharmaceutical
companies.
Prior
to
the
formation
of
Domain
Associates,
Dr.
Treu
was
vicepresident
of
the
predecessor
organization
to
The
Wilkerson
Group,
and
its
venture
capital
arm,
CW
Ventures.
Previous
to
that,
Dr.
Treu
held
a
number
ofmanagement
and
corporate
staff
positions
in
the
medical
industry,
including
positions
at
General
Electric
Company
and
Technicon
Instruments.
Dr.
Treu
holds
aB.S.
in
Physics
from
Rensselaer
Polytechnic
Institute
and
an
M.A.
and
a
Ph.D.
in
Physics
from
Princeton
University.Director Qualifications







Set
forth
below
is
a
summary
of
the
specific
experience,
qualifications,
attributes
or
skills
of
the
nominees
for
the
board
of
directors
that,
in
addition
to
theexperience
of
those
individuals
described
in
their
biographies
above,
led
our
nominating
and
corporate
governance
committee
and
board
to
conclude
that
thedirector
should
serve
as
a
member
of
the
board
of
directors.







Our
board
of
directors
has
concluded
that
Ms.
Anderson
should
serve
on
our
board
of
directors
due
to
her
extensive
industry
experience,
strategic
perspectiveof
our
development,
historic
knowledge
of
our
company
and
key
leadership
position
as
our
President
and
Chief
Executive
Officer.







Our
board
of
directors
has
concluded
that
Mr.
Atwood
should
serve
on
our
board
of
directors
due
to
his
experience
in
the
venture
capital
industry,
hisexperience
as
a
director
of
numerous
publicly
traded
and
privately
held
companies,
as
well
as
his
experience
founding
and
serving
as
President
and
ChiefExecutive
Officer
of
a
publicly
traded
biopharmaceutical
company.







Our
board
of
directors
has
concluded
that
Mr.
Bishop
should
serve
on
our
board
of
directors
due
his
significant
experience
as
the
chief
executive
officer
of
apublicly
traded
molecular
diagnostics
company,
his
experience
in
senior
management
positions
in
life
sciences
companies,
his
experience
as
a
director
of
publiclytraded
life
sciences
companies
and
his
extensive
experience
in
the
clinical
diagnostics,
life
science
and
biotechnology
industries.







Our
board
of
directors
has
concluded
that
Dr.
Cohen
should
serve
on
our
board
of
directors
due
to
his
significant
leadership
experience
in
the
medical
andfinance
fields
through
his
background
as
an
M.D.
and
a
venture
capitalist,
his
extensive
technical
expertise
relevant
to
our
business,
and
his
experience
as
aninvestor
in
and
on
the
boards
of
numerous
life
sciences
and
healthcare
companies.







Our
board
of
directors
has
concluded
the
Dr.
Epstein
should
serve
on
our
board
of
directors
due
to
his
extensive
experience
in
senior
and
strategic
roles
inhealthcare
companies,
his
expertise
in
reimbursement
and
FDA
regulation,
and
his
experience
as
a
director
of
publicly
traded
companies
in
the
life
sciencesindustry.







Our
board
of
directors
has
concluded
that
Ms.
Eastham
should
serve
on
our
board
of
directors
due
to
her
experience
as
a
director
of
numerous
life
sciencescompanies,
as
well
as
her
extensive
senior
management
experience
in
the
biopharmaceutical
industry,
particularly
in
key
corporate
finance
and
accountingpositions.







Our
board
of
directors
has
concluded
that
Mr.
Jones's
knowledge
of
the
life
sciences
industry
and
his
experience
as
a
chief
executive
officer
and
as
a
boardmember
of
other
publicly
traded
and
privately
held
life
sciences
companies
qualifies
him
to
serve
on
our
board
of
directors.127Table
of
Contents







Our
board
of
directors
has
concluded
that
Dr.
Nova's
knowledge
of
the
life
sciences
industry
and
her
experience
as
a
chief
executive
officer
and
as
a
boardmember
of
other
publicly
traded
and
privately
held
life
sciences
companies
qualifies
her
to
serve
on
our
board
of
directors.







Our
board
of
directors
has
concluded
that
Dr.
Treu
should
serve
on
our
board
of
directors
due
to
his
extensive
management
experience
in
the
healthcareindustry,
and
his
experience
as
an
investor
in
and
director
of
numerous
publicly
traded
and
private
life
sciences
and
healthcare
companies.Director Independence







The
board
of
directors
has
determined
that,
except
for
Ms.
Anderson,
each
individual
who
currently
serves
as
a
member
of
the
board
is,
and
each
individualwho
served
as
a
member
of
the
board
in
2015
was,
an
"independent
director"
within
the
meaning
of
Rule
5605
of
The
NASDAQ
Stock
Market.
Ms.
Anderson
isnot
considered
independent
as
she
is
employed
as
our
President
and
Chief
Executive
Officer.
For
Mr.
Atwood,
Mr.
Bishop,
Dr.
Cohen,
Ms.
Eastham,
Dr.
Epstein,Mr.
Jones,
Dr.
Nova
and
Dr.
Treu,
the
board
of
directors
considered
their
relationship
and
transactions
with
the
Company
as
directors
and
security
holders
of
theCompany.







The
board
of
directors
has
also
determined
that
each
director
who
serves
on
the
audit,
compensation,
and
nominating
and
corporate
governance
committees
is"independent,"
as
that
term
is
defined
for
such
committee
by
applicable
listing
standards
of
The
NASDAQ
Stock
Market
and
rules
of
the
SEC,
and
has
adoptedwritten
charters
for
each
of
these
committees.
The
charters
of
the
audit,
compensation
and
nominating
and
corporate
governance
committees
are
available
on
theinvestor
section
of
our
website
(www.veracyte.com)
under
the
corporate
governance
tab.Audit Committee Membership and Financial Expert







The
current
members
of
the
audit
committee
are
Karin
Eastham
(Chair),
Brian
G.
Atwood
and
Fred
E.
Cohen.
The
board
of
directors
has
determined
thatMs.
Eastham
is
qualified
as
an
"audit
committee
financial
expert"
under
the
definition
outlined
by
the
SEC.







There
have
been
no
material
changes
to
the
procedures
by
which
stockholders
may
recommend
nominees
to
our
Board
of
Directors.Code of Business Conduct and Ethics







We
have
adopted
a
Code
of
Business
Conduct
and
Ethics
that
applies
to
all
of
our
officers
and
employees,
including
our
President
and
Chief
ExecutiveOfficer,
our
Chief
Financial
Officer
and
other
employees
who
perform
financial
or
accounting
functions.
The
Code
of
Business
Conduct
and
Ethics,
which
isposted
on
our
website
at
http://www.veracyte.com ,
sets
forth
the
basic
principles
that
guide
the
business
conduct
of
our
employees.
We
have
also
adopted
a
SeniorFinancial
Officers'
Code
of
Ethics
that
specifically
applies
to
our
President
and
Chief
Executive
Officer,
our
Chief
Financial
Officer,
and
key
managementemployees.
Stockholders
may
request
a
free
copy
of
our
Code
of
Business
Conduct
and
Ethics
and
our
Senior
Financial
Officers'
Code
of
Ethics
by
contactingVeracyte,
Inc.,
Attention:
Chief
Financial
Officer,
6000
Shoreline
Court,
Suite
300,
South
San
Francisco,
California
94080.







To
date,
there
have
been
no
waivers
under
our
Code
of
Business
Conduct
and
Ethics
or
Senior
Financial
Officers'
Code
of
Ethics.
We
intend
to
disclose
futureamendments
to
certain
provisions
of
our
Code
of
Business
Conduct
and
Ethics
or
Senior
Financial
Officers'
Code
of
Ethics
or
waivers
of
such
Codes
granted
toexecutive
officers
and
directors
on
our
website
at
http://www.veracyte.com within
four
business
days
following
the
date
of
such
amendment
or
waiver.128Table
of
ContentsSection 16(a) Beneficial Ownership Reporting Compliance







Section
16(a)
of
the
Securities
Exchange
Act
of
1934
requires
our
executive
officers
and
directors,
and
persons
who
own
more
than
10%
of
a
registered
classof
our
equity
securities,
to
file
reports
of
ownership
on
Forms
3,
4
and
5
with
the
SEC.
Officers,
directors
and
greater
than
10%
stockholders
are
required
to
furnishus
with
copies
of
all
Forms
3,
4
and
5
they
file.
Based
solely
on
our
review
of
the
copies
of
such
forms
we
have
received
and
written
representations
from
certainreporting
persons
that
they
filed
all
required
reports,
we
believe
that
all
of
our
officers,
directors
and
greater
than
10%
stockholders
complied
on
a
timely
basis
withall
Section
16(a)
filing
requirements
applicable
to
them
with
respect
to
transactions
during
2015.







Certain
information
required
by
this
Item
concerning
executive
officers
is
set
forth
in
Part
I
of
this
Report
under
the
caption
"Executive
Officers
of
theRegistrant"
and
is
incorporated
herein
by
reference.ITEM
11.



EXECUTIVE
COMPENSATION








The
following
table
sets
forth
information
concerning
the
total
compensation
our
president
and
chief
executive
officer
and
two
other
highest
paid
executiveofficers,
who
we
refer
to
as
our
named
executive
officers,
earned
for
services
rendered
to
us
in
all
capacities
during
the
year
ended
December
31,
2015.Summary
Compensation
TableSalary







In
March
2016,
the
independent
members
of
the
board,
on
the
recommendation
of
the
compensation
committee,
approved
increases
in
the
base
salaries
of
thenamed
executive
officers
to
the
following
amounts:
Ms.
Anderson,
$500,000;
Ms.
Guyer,
$332,000;
and
Mr.
Hall,
$395,000.
The
increases
were
effective
as
ofJanuary
1,
2016.129Name
and
Principal
Position
Year
Salary
($)
Option
Awards
($)(1)
Non-Equity
Incentive
Plan
Compensation
($)
Total
($)
Bonnie
H.
Anderson

2015

457,000

1,212,413

200,000

1,869,413
President and Chief Executive Officer

2014

425,000

1,193,094

127,500

1,745,594
Shelly
D.
Guyer

2015

321,000

404,138

91,500

816,638
Chief Financial Officer

2014

300,000

596,547

54,000

950,547
Christopher
M.
Hall(2)

2015

383,000

431,080

115,000

929,080
Chief Operating Officer

2014

341,181

819,539

61,413

1,222,133
(1)Amounts
represent
the
aggregate
fair
value
of
the
option
awards
computed
as
of
the
grant
date
of
each
option
award
in
accordance
withTopic
718
for
financial
reporting
purposes,
rather
than
amounts
paid
to
or
realized
by
the
named
individual.
Our
assumptions
with
respectto
the
calculation
of
these
values
are
set
forth
in
the
Notes
to
Financial
Statements
included
in
our
Annual
Report
on
Form
10-K
for
theyear
ended
December
31,
2015.
There
can
be
no
assurance
that
option
awards
will
be
exercised
(in
which
case
no
value
will
be
realized
bythe
individual)
or
that
the
value
on
exercise
will
approximate
the
fair
value
as
computed
in
accordance
with
Topic
718.
(2)Mr.
Hall
was
our
chief
commercial
officer
until
he
was
appointed
our
chief
operating
officer
in
September
2014.Table
of
ContentsStock Option Awards







In
March
2016,
the
compensation
committee,
after
determination
of
overall
executive
compensation
by
the
independent
members
of
the
board,
approvedgrants
of
options
to
purchase
shares
of
our
common
stock
to
the
named
executive
officers
in
the
following
amounts:
Ms.
Anderson,
225,000
shares;
Ms.
Guyer,50,000
shares;
and
Mr.
Hall,
85,000
shares.
The
award
to
Ms.
Anderson
is
contingent
on
the
effectiveness
of
a
registration
statement
on
Form
S-8
to
registeradditional
securities
under
the
our
Stock
Incentive
Plan
and
continued
employment
on
the
date
of
such
award.
All
of
the
options
become
exercisable
as
to
25%
ofthe
shares
on
the
first
anniversary
of
the
grant
date,
and
the
remaining
shares
vest
at
a
rate
of
1/48th
of
the
total
number
of
shares
subject
to
the
options
each
monththereafter.
The
options
have
a
term
of
ten
years,
subject
to
earlier
termination
in
certain
events
relating
to
termination
of
employment.
If
an
option
holder
isterminated
without
"cause"
or
resigns
for
"good
reason"
(each
as
defined
in
the
applicable
option
agreement)
within
12
months
of
a
change
in
control,
100%
of
theshares
subject
to
the
option
shall
vest
immediately
prior
to
such
termination
or
resignation.Bonus Plans







For
2014,
the
independent
members
of
the
board
of
directors,
on
the
recommendation
of
the
compensation
committee,
approved
corporate
goals
relating
to
acorporate
bonus
plan.
Such
bonuses
may
be
paid
in
cash,
fully
vested
stock
options
or
restricted
stock,
or
any
combination
thereof,
at
the
discretion
of
theindependent
members
of
our
board.
The
potential
for
actual
awards
could
either
exceed
or
be
less
than
the
targets
established,
as
determined
by
the
independentmembers
of
our
board
in
their
discretion
based
on
the
recommendation
of
the
compensation
committee
and
based
on
corporate
and
individual
performance.Funding
of
the
2014
plan
was
dependent
upon
achieving
a
minimum
level
of
annual
revenue,
which
we
achieved.
The
size
of
the
2014
bonus
pool
could
have
beenreduced
to
the
extent
that
specified
corporate
performance
goals
were
not
achieved.
After
reviewing
our
achievement
of
the
corporate
performance
goals,
theindependent
members
of
the
board
determined
that,
although
the
corporate
performance
goals
had
been
achieved
at
a
lower
level,
other
achievements
during
2014,including
our
planned
entry
into
the
pulmonary
market
through
our
acquisition
of
Allegro
Diagnostics,
our
success
in
increasing
the
number
of
covered
lives
forAfirma
and
our
reimbursement
progress,
warranted
payouts
to
our
executive
officers
of
60%
of
their
target
bonus
levels.
In
2014,
target
bonus
levels
forMs.
Anderson,
Ms.
Guyer
and
Mr.
Hall
were
50%,
30%
and
30%
of
base
salary,
respectively.







In
March
2015,
the
independent
members
of
the
board
of
directors,
on
the
recommendation
of
the
compensation
committee,
approved
a
corporate
bonus
planfor
the
2015
fiscal
year.
Under
the
plan,
eligible
executive
officers
and
employees
were
eligible
to
receive
annual
incentive
compensation
if
the
company
achievedthe
corporate
goals
approved
by
the
board.
Such
bonuses
may
be
paid
in
cash,
fully
vested
stock
options
or
restricted
stock,
or
any
combination
thereof,
at
thediscretion
of
the
independent
members
of
the
board.
Actual
awards
under
the
2015
bonus
plan
could
either
exceed
or
be
less
than
the
targets
established,
asdetermined
by
the
independent
members
of
the
board
in
their
discretion
based
on
the
recommendation
of
the
compensation
committee
and
based
on
corporate
andindividual
performance.
Bonus
target
levels
under
the
2015
bonus
plan
for
Ms.
Anderson,
Ms.
Guyer
and
Mr.
Hall
were
60%,
40%
and
40%
of
base
salary,respectively.
Funding
of
the
bonus
pool
for
the
2015
plan
was
dependent
upon
achieving
a
minimum
level
of
annual
revenue,
and
achievement
in
excess
of
suchminimum
threshold
could
have
resulted
in
funding
of
the
bonus
pool
up
to
a
maximum
level
of
150%.
The
size
of
the
bonus
pool
could
also
be
reduced
to
theextent
that
corporate
performance
goals
were
not
achieved.







In
March
2016,
the
independent
members
of
the
board,
on
the
recommendation
of
the
compensation
committee,
approved
funding
the
bonus
pool
at
75%based
upon
the
revenue
achieved
by
the
Company
plus
100%
achievement
of
all
milestones
set
forth
in
the
plan
that
affected
the
total
funding
and
payout.
At
thattime
the
independent
members
of
the
board
approved
awards
to
our
named
executive
officers,
based
upon
the
corporate
goal
achievements
in
addition
to
eachexecutive
officer's
achievement
of
their
individual
goals
as
follows:
Ms.
Anderson,
$200,000;
Ms.
Guyer,
$91,500;
and
Mr.
Hall,
$115,000.130Table
of
Contents







Performance
goals
for
2015
included
commercializing
Percepta,
representing
40%
of
the
overall
objectives,
reporting
a
minimum
number
of
GECs,representing
20%
of
the
overall
objectives,
financial
objectives
including
end
of
year
cash
balance,
representing
20%
of
the
overall
objectives,
and
productdevelopment
objectives
including
a
milestone
related
to
performance
of
a
classifier
in
our
lung
disease
product,
representing
20%
of
the
overall
objectives.







In
March
2016,
the
independent
members
of
the
board
of
directors,
on
the
recommendation
of
the
compensation
committee,
approved
a
corporate
bonus
planfor
the
2016
fiscal
year.
Under
the
plan,
eligible
executive
officers
and
employees
are
eligible
to
receive
annual
incentive
compensation
if
the
company
achievesthe
corporate
goals
approved
by
the
board.
Such
bonuses
may
be
paid
in
cash,
fully
vested
stock
options
or
restricted
stock,
or
any
combination
thereof,
at
thediscretion
of
the
independent
members
of
the
Board.
Actual
awards
under
the
2016
bonus
plan
could
either
exceed
or
be
less
than
the
targets
established,
asdetermined
by
the
independent
members
of
the
board
in
their
discretion
based
on
the
recommendation
of
the
compensation
committee
and
based
on
corporate
andindividual
performance.
Bonus
target
levels
under
the
2016
bonus
plan
for
Ms.
Anderson,
Ms.
Guyer
and
Mr.
Hall
are
65%,
40%
and
50%
of
base
salary,respectively.







Funding
of
the
2016
bonus
pool
for
the
plan
is
dependent
upon
achieving
a
minimum
level
of
annual
revenue,
and
achievement
in
excess
of
such
minimumthreshold
can
result
in
funding
of
the
bonus
pool
up
to
a
maximum
level
of
150%.
The
size
of
the
bonus
pool
could
be
reduced
to
the
extent
that
corporateperformance
goals
are
not
achieved.
These
performance
goals
include
commercial
objectives,
representing
70%
of
the
overall
objectives,
product
developmentobjectives,
representing
20%
of
the
overall
objectives
and
financial
objectives,
representing
10%
of
the
overall
objectives.Termination-based Compensation







On
May
15,
2015,
we
entered
into
Amended
and
Restated
Change
of
Control
and
Severance
agreements
with
each
of
our
named
executive
officers.
Each
ofthese
agreements
has
an
initial
term
of
four
years,
which
term
automatically
renews
for
additional
one-year
periods
unless
either
party
provides
written
notice
ofnon-renewal
at
least
60
days
prior
to
the
date
of
automatic
renewal
and
which
term
extends
for
one
year
from
a
"change
of
control,"
as
defined
in
the
agreement,
ifsuch
change
of
control
occurs
within
the
final
12
months
of
the
initial
term
or
the
term
as
extended
through
automatic
renewal.
Pursuant
to
the
agreement,
if
thenamed
executive
officer
is
terminated
by
us
without
"cause"
(as
defined
in
the
agreement),
or
terminates
his
or
her
employment
for
"good
reason"
(as
defined
in
theagreement),
each
during
a
period
not
within
two
months
prior
to
and
ending
12
months
following
a
change
of
control,
or
the
"change
of
control
period"
(as
definedin
the
agreement),
he
or
she
is
entitled
to
the
following
benefits:







Ms.
Anderson—(i)
12
months
of
salary
continuation
from
the
termination
date,
(ii)
a
lump
sum
payment
equal
to
her
pro-rated
annual
bonus
for
performanceup
to
the
end
of
the
applicable
performance
period
and
(iii)
accelerated
vesting
equal
to
50%
of
any
outstanding
equity
awards
along
with
the
extension
of
the
post-termination
exercise
period
of
such
awards
to
24
months
after
the
termination
date.







Ms.
Guyer
and
Mr.
Hall—six
months
of
salary
continuation
from
the
termination
date.







If
Ms.
Anderson
is
terminated
by
us
without
cause,
or
Ms.
Anderson
terminates
her
employment
for
good
reason
each
during
the
change
of
control
period,Ms.
Anderson
is
entitled
to
(i)
a
lump
sum
severance
payment
equal
to
24
months
of
salary
from
the
termination
date,
(ii)
a
lump
sum
payment
equal
to
100%
ofthe
higher
of
her
(A)
annual
target
bonus
for
the
year
in
which
the
change
of
control
occurs,
(B)
annual
target
bonus
for
the
year
in
which
the
termination
occurs,
or(C)
actual
bonus
for
the
year
prior
to
the
year
in
which
the
termination
occurs
and
(iii)
accelerated
vesting
equal
to
100%
of
any
outstanding
equity
awards.







If
Ms.
Guyer
or
Mr.
Hall
is
terminated
by
us
without
cause,
or
Ms.
Guyer
or
Mr.
Hall
terminates
their
employment
for
good
reason,
each
during
the
change
ofcontrol
period,
Ms.
Guyer
and
Mr.
Hall
are131Table
of
Contentsentitled
to
(i)
a
lump
sum
severance
payment
equal
to
12
months
of
salary
from
the
termination
date,
(ii)
a
lump
sum
payment
equal
to
100%
the
highest
of
his
orher
(A)
annual
target
bonus
for
the
year
in
which
the
change
of
control
occurs,
(B)
annual
target
bonus
for
the
year
in
which
the
termination
occurs,
or
(C)
actualbonus
for
the
year
prior
to
the
year
in
which
the
termination
occurs
and
(iii)
accelerated
vesting
equal
to
100%
of
any
outstanding
equity
awards.







The
receipt
of
the
above-described
benefits
are
subject
to
the
named
executive
officer
executing
a
release
of
certain
claims
against
us.
Further,
in
either
of
theabove
situations
the
named
executive
officer
will
also
be
reimbursed
(or
receive
payments
in
lieu
of
such
reimbursements)
if
he
or
she
elects
and
pays
to
continuehealth
insurance
under
the
Consolidated
Omnibus
Budget
Reconciliation
Act
of
1985,
or
COBRA,
for
any
premiums
paid
for
continued
health
benefits
for
theexecutive
and
his
or
her
eligible
dependents
until
the
earlier
of
(i)
the
end
of
the
salary
continuation
period
date
or
(ii)
the
date
upon
which
the
executive
and
his
orher
eligible
dependents
become
covered
under
similar
plans.







From
time
to
time,
our
executive
officers
and
directors
may
enter
into
written
trading
plans
pursuant
to
Rule
10b5-1
of
the
Securities
and
Exchange
Act
of1934.2015
Outstanding
Equity
Awards
at
Fiscal
Year-End132


Option
Awards(1)
Name
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
Number
of
Securities
Underlying
Options
(#)
Unexercisable
Option
Exercise
Price
($)
Option
Expiration
Date
Bonnie
H.
Anderson

11,153(2)(3)
—
$0.80

02/02/2020


97,000(2)(4)
—
$2.36

09/27/2020


18,125(5)
—
$2.36

02/22/2021


32,782(5)
—
$2.68

03/09/2022


143,750(2)(6)
—
$2.68

03/09/2022


112,500(2)(7)
—
$4.00

02/05/2023


24,112(5)
—
$4.00

02/05/2023


12,500(8)
—
$4.00

02/05/2023


64,164

75,836
$14.34

02/19/2024


—

225,000
$8.86

03/02/2025
Shelly
D.
Guyer

146,750(2)(9)
—
$6.04

06/20/2023


32,081

37,919
$14.34

02/19/2024


—

75,000
$8.86

03/02/2025
Christopher
M.
Hall

100,000(2)(10)
—
$0.80

03/29/2020


12,500(2)(4)
—
$2.36

09/27/2020


11,000(5)
—
$2.36

02/22/2021


37,500(2)(6)
—
$2.68

03/09/2022


16,927(5)
—
$2.68

03/09/2022


31,250(2)(7)
—
$4.00

02/05/2023


11,767(5)
—
$4.00

02/05/2023


32,081

37,919
$14.34

02/19/2024


12,498

27,502
$10.45

09/16/2024


—

80,000
$8.86

03/02/2025
(1)Except
as
otherwise
noted,
options
become
exercisable
as
to
25%
of
the
shares
on
the
first
anniversary
of
the
grant
date,
and
the
remainingshares
vest
at
a
rate
of
1/48th
of
the
total
number
of
sharesTable
of
Contents2015
Director
Compensation







The
following
table
sets
forth
cash
amounts
and
the
value
of
other
compensation
earned
by
our
outside
directors
for
their
service
in
2015:133subject
to
the
options
each
month
thereafter.
The
options
have
a
term
of
ten
years,
subject
to
earlier
termination
in
certain
events
relating
totermination
of
employment.
If
an
option
holder
is
terminated
without
"cause"
or
resigns
for
"good
reason"
(each
as
defined
in
theapplicable
option
agreement)
within
12
months
of
a
change
in
control,
100%
of
the
shares
subject
to
the
option
shall
vest
immediately
priorto
such
termination
or
resignation.(2)The
option
may
be
exercised
in
full
prior
to
the
vesting
of
the
shares
underlying
the
option.
Vesting
is
subject
to
continued
service
on
theapplicable
vesting
date.
(3)The
option
vested
at
a
rate
of
1/24th
of
the
total
number
of
shares
subject
to
the
option
each
month
following
the
vesting
commencementdate.
The
vesting
commencement
date
is
January
1,
2010.
(4)The
vesting
commencement
date
is
September
28,
2010.
(5)The
option
was
fully
vested
on
the
date
of
grant.
(6)The
vesting
commencement
date
is
March
10,
2012.
(7)The
vesting
commencement
date
is
February
5,
2013.
(8)The
option
vested
in
full
upon
the
closing
of
our
initial
public
offering.
(9)The
vesting
commencement
date
is
April
8,
2013.
(10)The
vesting
commencement
date
is
March
15,
2010.Name
Fees
Earned
or
Paid
in
Cash
($)
Option
Awards
($)(1)(2)
Total
($)
Brian
G.
Atwood

67,000

55,615

122,615
John
L.
Bishop

41,000

—

41,000
Fred
E.
Cohen

42,500

55,615

98,115
Karin
Eastham

53,025

55,615

108,640
Robert
S.
Epstein(3)

38,310

175,095

213,405
Evan
Jones

45,000

55,615

100,615
Tina
S.
Nova(4)

6,164

115,609

121,773
Jesse
I.
Treu

42,500

55,615

98,115
(1)Amounts
represent
the
aggregate
fair
value
of
the
option
awards
computed
as
of
the
grant
date
of
each
award
in
accordance
withFinancial
Accounting
Standards
Board
Accounting
Standards
Codification
Topic
718
(ASC
718)
for
financial
reporting
purposes,rather
than
amounts
paid
to
or
realized
by
the
named
individual.
Our
assumptions
with
respect
to
the
calculation
of
these
values
areset
forth
in
the
Notes
to
Financial
Statements
in
our
Annual
Report
on
Form
10-K
for
the
year
ended
December
31,
2015.
Therecan
be
no
assurance
that
option
awards
will
be
exercised
(in
which
case
no
value
will
be
realized
by
the
individual)
or
that
thevalue
on
exercise
will
approximate
the
fair
value
as
computed
in
accordance
with
ASC
718.Table
of
Contents







Directors
who
are
employees
do
not
receive
any
fees
for
their
service
on
the
board
of
directors
or
any
committee.
Our
non-employee
directors
receive
anannual
cash
retainer
of
$35,000
for
their
service
on
our
board
of
directors.
Members
of
our
audit
committee,
compensation
committee
and
nominating
andcorporate
governance
committee,
other
than
the
chair
of
each
such
committee,
receive
an
additional
annual
cash
retainer
of
$7,500,
$6,000
and
$4,500,respectively.
The
chair
of
our
audit
committee,
compensation
committee
and
nominating
and
corporate
governance
committee
each
receive
an
additional
annualcash
retainer
of
$15,000,
$10,000
and
$7,500,
respectively.
Additionally,
the
individual
acting
as
chairman
of
the
board
of
directors
receives
an
additional
annualcash
retainer
of
$20,000.
All
annual
cash
retainers
are
payable
quarterly
in
arrears
and
are
pro-rated
for
partial
service
in
any
year.
We
also
reimburse
our
non-employee
directors
for
their
reasonable
out-of-pocket
costs
and
travel
expenses
in
connection
with
their
attendance
at
board
of
directors
and
committee
meetings
inaccordance
with
our
travel
policy.







After
our
initial
public
offering
in
October
2013,
any
non-employee
director
who
first
joins
our
board
of
directors
will
be
automatically
granted
an
initialstock
option
to
purchase
35,000
shares
of
our
common
stock
at
an
exercise
price
equal
to
the
fair
market
value
of
our
common
stock
on
the
date
of
grant.
Theoption
will
vest
and
become
exercisable
as
to
25%
of
those
shares
on
the
first
anniversary
of
the
date
of
grant,
and
the
remaining
shares
vest
and
becomeexercisable
in
equal
monthly
installments
over
the
following
three
years.
On
the
first
business
day
after
each
annual
meeting
of
stockholders,
each
non-employeedirector
who
continues
to
serve
on
our
board
of
directors
will
be
automatically
granted
an
option
to
purchase
10,000
shares
of
our
common
stock
at
an
exerciseprice
equal
to
the
fair
market
value
of
our
common
stock
on
the
date
of
grant.
Each
of
these
options
will
vest
in
full
on
the
first
anniversary
of
the
date
of
grant
or,if
earlier,
the
date
of
the
next
annual
meeting
of
stockholders.
The
vesting
of
the
options
described
above
will
accelerate
in
full
upon
a
"change
in
control"
asdefined
in
our
2013
Stock
Incentive
Plan.ITEM
12.



SECURITY
OWNERSHIP
OF
CERTAIN
BENEFICIAL
OWNERS
AND
MANAGEMENT
AND
RELATED
STOCKHOLDER
MATTERSSecurity
Ownership
of
Certain
Beneficial
Owners
and
Management







The
following
table
sets
forth
information
regarding
the
number
of
shares
of
common
stock
beneficially
owned
on
February
29,
2016,
by:•each
person
who
is
known
by
us
to
beneficially
own
5%
or
more
of
our
common
stock;
•each
of
our
named
executive
officers
and
directors;
and134(2)The
following
sets
forth
the
number
of
shares
of
common
stock
subject
to
outstanding
options
held
by
non-employee
directors
atDecember
31,
2015,
as
applicable:Name
Number
of
Shares
Brian
G.
Atwood

20,000
John
L.
Bishop

35,000
Fred
E.
Cohen

20,000
Karin
Eastham

60,000
Robert
S.
Epstein

35,000
Evan
Jones

55,000
Tina
S.
Nova

35,000
Jesse
I.
Treu

20,000
(3)Robert
S.
Epstein
joined
our
board
on
January
12,
2015.
(4)Tina
S.
Nova
joined
our
board
on
November
12,
2015.Table
of
Contents•all
of
our
executive
officers
and
directors
as
a
group.







We
have
determined
beneficial
ownership
in
accordance
with
SEC
rules.
Except
as
indicated
by
the
footnotes
below,
we
believe,
based
on
the
informationfurnished
to
us,
that
the
persons
and
entities
named
in
the
table
below
have
sole
voting
and
dispositive
power
with
respect
to
all
shares
of
common
stock
that
theybeneficially
own,
subject
to
applicable
community
property
laws.







Applicable
percentage
ownership
is
based
on
27,853,447
shares
of
common
stock
outstanding
at
February
29,
2016.135Table
of
Contents







Except
as
otherwise
set
forth
below,
the
address
of
each
beneficial
owner
is
6000
Shoreline
Court,
Suite
300,
South
San
Francisco,
California
94080.136Name
and
Address
of
Beneficial
Owner
Number
of
Shares
Beneficially
Owned(1)
Percentage
of
Shares
Beneficially
Owned
5%
Stockholders:






Entities
affiliated
with
Domain
Partners(2)

2,796,024

9.6%KPCB
Holdings,
Inc.(3)

3,551,929

12.2%TPG
Biotechnology
Partners
II,
L.P(4)

3,551,929

12.2%Entities
affiliated
with
Versant
Ventures(5)

3,626,221

12.4%Eventide
Asset
Managemment,
LLC(6)

2,252,000

7.7%Acuta
Capital
Partners
LLC(7)

1,716,000

5.9%Directors
and
Executive
Officers:






Bonnie
H.
Anderson(8)

683,087

2.3%Brian
G.
Atwood(5)

3,626,221

12.4%John
L.
Bishop(9)

11,666

*
Fred
E.
Cohen,
M.D.,
D.Phil.(10)

10,000

*
Karin
Eastham(11)

63,227

*
Robert
S.
Epstein,
M.D.,
M.S.(12)

10,937

*
Evan
Jones(13)

403,907

1.4%Tina
S.
Nova

—

—
Jesse
I.
Treu,
Ph.D.(2)

2,796,024

9.6%Shelly
D.
Guyer(14)

203,414

*
Christopher
M.
Hall(15)

294,689

1.0%All
directors
and
executive
officers
as
a
group
(12
persons)(16)

8,165,320

28.0%*Less
than
1%
(1)Unless
otherwise
indicated,
includes
shares
owned
by
a
spouse,
minor
children
and
relatives
sharing
the
same
home,
as
well
as
entitiesowned
or
controlled
by
the
named
person.
Also
includes
options
to
purchase
shares
of
common
stock
exercisable
within
60
days
ofFebruary
29,
2016.
Unless
otherwise
indicated,
shares
are
owned
of
record
and
beneficially
by
the
named
person.
(2)Based
on
a
Schedule
13G/A
filed
on
February
2,
2015,
includes
2,763,294
shares
held
by
Domain
Partners
VIII,
L.P.
and
22,730
sharesheld
by
DP
VIII
Associates,
L.P.
The
managing
members
of
One
Palmer
Square
Associates
VIII,
L.L.C.,
the
general
partner
of
DomainPartners
VIII,
L.P.
and
DP
VIII
Associates,
L.P.,
share
voting
and
dispositive
power
with
respect
to
these
shares.
The
managing
membersof
One
Palmer
Square
Associates
VIII,
L.L.C.
are
Jesse
I.
Treu,
a
member
of
our
board
of
directors,
James
C.
Blair,
Brian
H.
Dovey,
BrianK.
Halak,
Kathleen
K.
Schoemaker
and
Nicole
Vitullo.
Each
of
Jesse
I.
Treu,
James
C.
Blair,
Brian
H.
Dovey,
Brian
K.
Halak,
Kathleen
K.Schoemaker
and
Nicole
Vitullo
disclaims
beneficial
ownership
of
these
shares
except
to
the
extent
of
his
or
her
pecuniary
interest
therein.Also
includes
an
option
to
purchase
10,000
shares
of
our
common
stock
which
is
exercisable
within
60
days
of
February
29,
2016
by
JesseI.
Treu.
The
address
for
the
entities
and
individuals
affiliated
with
Domain
Partners
is
One
Palmer
Square,
Suite
515,
Princeton,
NewJersey
08542.
(3)Based
on
a
Schedule
13G
filed
on
February
14,
2014,
includes
3,174,484
shares
of
common
stock
beneficially
owned
by
Kleiner
PerkinsCaufield
&
Byers
XII,
LLC,
or
KPCB
XII;
45,695
shares
of
common
stock
beneficially
owned
by
KPCB
XII
Founders
Fund,
LLC,
orKPCB
XII
FF;
61,435
shares
of
common
stock
beneficially
owned
by
Brook
H.
Byers;
and
270,315
shares
of
common
stock
beneficiallyowned
by
individuals
and
entities
associated
with
Kleiner
Perkins
Caufield
&
Byers.
AllTable
of
Contents137shares
are
held
for
convenience
in
the
name
of
"KPCB
Holdings,
Inc.
as
nominee,"
for
the
accounts
of
such
individuals
and
entities
whoeach
exercise
their
own
voting
and
dispositive
power
over
such
shares.
The
managing
member
of
KPCB
XII
and
KPCB
XII
FF
is
KPCBXII
Associates,
LLC
("KPCB
XII
Associates").
Brook
H.
Byers,
L.
John
Doerr,
Joseph
Lacob,
Raymond
J.
Lane
and
Theodore
E.
Schlein,the
managers
of
KPCB
XII
Associates,
exercise
shared
voting
and
dispositive
power
over
the
shares
directly
held
by
KPCB
XII
and
KPCBXII
FF.
The
address
of
the
entities
and
individuals
affiliated
with
Kleiner
Perkins
Caufield
&
Byers
is
2750
Sand
Hill
Road,
Menlo
Park,California
94025.(4)Based
on
a
Schedule
13G
filed
on
February
13,
2014,
consists
of
3,551,929
shares
held
by
TPG
Biotechnology
Partners
II,
L.P.,
aDelaware
limited
partnership
whose
general
partner
is
TPG
Biotechnology
GenPar
II,
L.P.,
a
Delaware
limited
partnership,
whose
generalpartner
is
TPG
Biotechnology
GenPar
II
Advisors,
LLC,
a
Delaware
limited
liability
company,
whose
sole
member
is
TPG
HoldingsI,
L.P.,
a
Delaware
limited
partnership,
whose
general
partner
is
TPG
Holdings
I-A,
LLC,
a
Delaware
limited
liability
company,
whosesole
member
is
TPG
Group
Holdings
(SBS),
L.P.,
a
Delaware
limited
partnership,
whose
general
partner
is
TPG
Group
Holdings
(SBS)Advisors,
Inc.,
a
Delaware
corporation.
David
Bonderman
and
James
G.
Coulter
are
officers
and
sole
shareholders
of
TPG
Group
Holdings(SBS)
Advisors,
Inc.
and
may
therefore
be
deemed
to
be
the
beneficial
owners
of
the
shares
held
by
TPG
Biotechnology
Partners
II,
L.P.Messrs.
Bonderman
and
Coulter
disclaim
beneficial
ownership
of
the
shares
held
by
TPG
Biotechnology
Partners
II,
L.P.
except
to
theextent
of
their
pecuniary
interest
therein.
The
address
of
TPG
Group
Holdings
(SBS)
Advisors,
Inc.
and
Messrs.
Bonderman
and
Coulter
isc/o
TPG
Global,
LLC,
301
Commerce
Street,
Suite
3300,
Fort
Worth,
Texas
76102.
(5)Based
on
a
Schedule
13G/A
filed
on
February
9,
2016,
includes
3,594,989
shares
held
by
Versant
Venture
Capital
III,
L.P.
and
21,232shares
held
by
Versant
Side
Fund
III,
L.P.
Versant
Ventures
III,
LLC,
the
sole
general
partner
of
Versant
Venture
Capital
III,
L.P.
andVersant
Side
Fund
III,
L.P.,
has
voting
and
dispositive
power
with
respect
to
these
shares.
The
individual
managing
directors
and/ormembers
of
Versant
Ventures
III,
LLC
are
Brian
G.
Atwood,
Bradley
J.
Bolzon,
Samuel
D.
Colella,
Ross
A.
Jaffe,
William
J.
Link,Barbara
N.
Lubash,
Donald
B.
Milder,
Robin
L.
Praeger,
Rebecca
B.
Robertson
and
Charles
M.
Warden,
all
of
whom
share
voting
anddispositive
power
with
respect
to
these
shares.
Mr.
Atwood
is
a
member
of
our
board
of
directors.
Each
individual
managing
memberdisclaims
beneficial
ownership
of
these
shares,
except
to
the
extent
of
their
pecuniary
interest
in
such
shares.
Also
includes
an
option
topurchase
10,000
shares
of
our
common
stock
which
is
exercisable
within
60
days
of
February
29,
2016
held
by
Brian
G.
Atwood.
Theaddress
of
the
entities
and
individuals
affiliated
with
Versant
Ventures
is
One
Sansome
Street,
Suite
3630,
San
Francisco,
California95104.
(6)Based
on
a
Schedule
13G
filed
on
February
12,
2016,
Eventide
Asset
Management,
LLC
has
sole
voting
and
dispositive
power
withrespect
to
the
shares
of
common
stock
held
by
registered
investment
companies,
for
which
Eventide
Asset
Management
LLC
acts
asinvestment
adviser.
The
address
of
Eventide
Asset
Management
LLC
is
One
International
Place,
35
th
Floor,
Boston,Massachusetts,
02110.
(7)Based
on
a
Schedule
13G
filed
on
February
12,
2016,
Acuta
Capital
Partners
LLC
has
sole
voting
and
dispositive
power
with
respect
to
theshares.
The
address
of
Acuta
Capital
Partners
LLC
is
1301
Shoreway
Road,
Suite
350,
Belmont,
California,
94002.
(8)Consists
of
options
to
purchase
683,087
shares
of
our
common
stock
which
are
exercisable
within
60
days
of
February
29,
2016,
23,439
ofwhich
are
subject
to
the
right
of
repurchase,
which
right
lapses
over
time.
(9)Consists
of
options
to
purchase
11,666
shares
of
our
common
stock
which
are
exercisable
within
60
days
of
February
29,
2016.Table
of
ContentsEquity
Compensation
Plan
Information







The
following
table
gives
information
about
our
common
stock
that
may
be
issued
upon
the
exercise
of
options
under
our
equity
compensation
plans
as
ofDecember
31,
2015:138(10)Consists
of
options
to
purchase
10,000
shares
of
our
common
stock
which
are
exercisable
within
60
days
of
February
29,
2016.
Does
notinclude
3,551,929
shares
held
by
TPG
Biotechnology
Partners
II,
L.P.
Dr.
Cohen
is
a
TPG
partner.
Dr.
Cohen
does
not
have
voting
ordispositive
power
with
respect
to
the
shares
held
by
TPG
Biotechnology
Partners
II,
L.P.
and
disclaims
beneficial
ownership
of
suchshares.
The
address
of
Dr.
Cohen
is
c/o
TPG
Global,
LLC,
301
Commerce
Street,
Suite
3300,
Fort
Worth,
Texas
76102.
(11)Includes
options
to
purchase
50,000
shares
of
our
common
stock
which
are
exercisable
at
February
29,
2016,
12,657
of
which
are
subjectto
the
right
of
repurchase,
which
right
lapses
over
time.
Also
includes
13,227
shares
held
by
the
Karin
Eastham
Defined
Benefit
Plan.
(12)Consists
of
options
to
purchase
10,937
shares
of
our
common
stock
which
are
exercisable
within
60
days
of
February
29,
2016.
(13)Includes
options
to
purchase
45,000
shares
of
our
common
stock
which
are
exercisable
within
60
days
of
February
29,
2016.
Also
includes358,907
shares
held
by
jVen
Capital,
LLC,
of
which
Mr.
Jones
is
Managing
Member.
(14)Consists
of
options
to
purchase
203,414
shares
of
our
common
stock
which
are
exercisable
within
60
days
of
February
29,
2016,
37,500
ofwhich
are
subject
to
the
right
of
repurchase,
which
right
lapses
over
time.
(15)Consists
of
options
to
purchase
294,689
shares
of
our
common
stock
which
are
exercisable
within
60
days
of
February
29,
2016,
6,512
ofwhich
are
subject
to
the
right
of
repurchase,
which
right
lapses
over
time.
(16)Includes
options
to
purchase
1,288,453
shares
of
our
common
stock
which
are
exercisable
within
60
days
of
February
29,
2016,
80,108
ofwhich
are
subject
to
the
right
of
repurchase,
which
right
lapses
over
time.


Number
of
securities
to
be
issued
upon
exercise
of
outstanding
options,
warrants
and
rights
Weighted-average
exercise
price
of
outstanding
options,
warrants
and
rights
Number
of
securities
remaining
available
for
future
issuance
under
equity
compensation
plans
(excluding
securities
reflected
in
column
(a))



(a)

(b)

(c)

Plan
Category









Equity
compensation
plans
approved
by
security
holders

4,179,521
$8.03

1,058,359
Equity
compensation
plans
not
approved
by
securityholders

—

—

—
Total

4,179,521
$8.03

1,058,359
Table
of
ContentsITEM
13.



CERTAIN
RELATIONSHIPS
AND
RELATED
TRANSACTIONS,
AND
DIRECTOR
INDEPENDENCE
Certain
Relationships
and
Related
Party
Transactions







In
addition
to
the
compensation
arrangements
of
our
directors
and
named
executive
officers
discussed
elsewhere
in
Part
III
of
this
Form
10-K,
the
following
isa
description
of
transactions
since
January
1,
2015,
to
which
we
have
been
or
will
be
a
party,
and
in
which
the
amount
involved
exceeded
or
will
exceed
$120,000and
in
which
any
of
our
directors,
executive
officers,
beneficial
holders
of
more
than
5%
of
our
capital
stock,
or
entities
affiliated
with,
or
immediate
familymembers
of,
any
of
the
foregoing,
had
or
will
have
a
direct
or
indirect
material
interest.Indemnification Agreements







We
have
entered
into
indemnification
agreements
with
our
directors
and
executive
officers.
These
agreements
require
us
to
indemnify
these
individuals
to
thefullest
extent
permitted
under
Delaware
law
against
liabilities
that
may
arise
by
reason
of
their
service
to
us,
and
to
advance
expenses
incurred
as
a
result
of
anyproceeding
against
them
as
to
which
they
could
be
indemnified.Related Party Transaction Approval







In
October
2013,
our
board
of
directors
adopted
a
formal
policy
that
our
executive
officers,
directors,
holders
of
more
than
5%
of
any
class
of
our
votingsecurities,
and
any
member
of
the
immediate
family
of
and
any
entity
affiliated
with
any
of
the
foregoing
persons,
are
not
permitted
to
enter
into
a
related
partytransaction
with
us
without
the
prior
consent
of
the
disinterested
and
independent
members
of
our
board
of
directors.
Any
request
for
us
to
enter
into
a
transactionwith
an
executive
officer,
director,
principal
stockholder,
or
any
of
their
immediate
family
members
or
affiliates,
in
which
the
amount
involved
exceeds
$120,000must
first
be
presented
to
the
disinterested
and
independent
members
of
our
board
of
directors
for
review,
consideration
and
approval.
In
approving
or
rejecting
anysuch
proposal,
the
disinterested
and
independent
members
of
our
board
of
directors
will
consider
all
relevant
facts
and
circumstances
reasonably
available
to
them.







Although
we
did
not
have
a
written
policy
for
the
review
and
approval
of
transactions
with
related
persons
prior
to
October
2013,
our
board
of
directors
hashistorically
reviewed
and
approved
any
transaction
where
a
director
or
officer
had
a
financial
interest.
Prior
to
approving
such
a
transaction,
the
material
facts
as
toa
director's
or
officer's
relationship
or
interest
as
to
the
agreement
or
transaction
were
disclosed
to
our
board
of
directors.
Our
board
of
directors
would
take
thisinformation
into
account
when
evaluating
the
transaction
and
in
determining
whether
such
a
transaction
was
fair
to
the
company
and
in
the
best
interests
of
all
ofour
stockholders.
In
addition,
for
each
related
party
transaction,
the
disinterested
directors
in
the
context
of
each
such
transaction
approved
the
applicableagreement
and
transaction.







Certain
information
required
by
this
Item
concerning
director
independence
is
set
forth
in
Item
10.
Directors,
Executive
Officers
and
Corporate
Governanceunder
the
caption
"Director
Independence"
and
is
incorporated
herein
by
reference.ITEM
14.



PRINCIPAL
ACCOUNTANT
FEES
AND
SERVICES








The
audit
committee
appointed
Ernst
&
Young
LLP
("EY")
as
our
independent
registered
public
accounting
firm
for
the
fiscal
year
ending
December
31,2016.
EY
audited
our
financial
statements
in
2015
and
2014.139Table
of
ContentsPrincipal
Accountant
Fees
and
Services







The
following
table
sets
forth
the
fees
billed
by
EY
for
audit
and
other
services
rendered:Pre-approval
Policies
and
Procedures







In
connection
with
our
initial
public
offering,
our
audit
committee
established
a
policy
to
pre-approve
all
audit
and
permissible
non-audit
services
provided
byour
independent
registered
public
accounting
firm.
All
of
the
services
provided
were
pre-approved
to
the
extent
required.
During
the
approval
process,
the
auditcommittee
considers
the
impact
of
the
types
of
services
and
the
related
fees
on
the
independence
of
the
independent
registered
public
accounting
firm.
The
servicesand
fees
must
be
deemed
compatible
with
the
maintenance
of
that
firm's
independence,
including
compliance
with
rules
and
regulations
of
the
SEC.
Throughoutthe
year,
the
audit
committee
will
review
any
revisions
to
the
estimates
of
audit
and
non-audit
fees
initially
approved.140


Year
Ended
December
31,



2015
2014
Audit
Fees(1)
$804,400
$798,180
Audit-related
Fees

—

—
Tax
Fees(2)

36,200

—
All
Other
Fees(3)

—

66,995

$840,600
$865,175
(1)Audit
fees
include
fees
and
out-of-pocket
expenses,
whether
or
not
yet
invoiced,
for
professional
services
provided
in
connectionwith
the
audit
of
our
annual
financial
statements
and
review
of
our
quarterly
financial
statements.
(2)Tax
fees
consist
of
federal
and
state
tax
compliance
and
planning,
tax
advice
and
preparation
of
tax
returns.
(3)All
other
fees
consist
of
fees
for
professional
services
provided
in
connection
with
our
acquisition
of
Allegro
Diagnostics
Corp.
andother
accounting
consultation.Table
of
ContentsPART
IV
ITEM
15.



EXHIBITS
AND
FINANCIAL
STATEMENT
SCHEDULES
(a)Documents
filed
as
part
of
this
report







1.




Financial
Statements:







Reference
is
made
to
the
Index
to
Financial
Statements
of
Veracyte,
Inc.
included
in
Item
8
of
Part
II
hereof.







2.




Financial
Statement
Schedules







All
schedules
have
been
omitted
because
they
are
not
required,
not
applicable,
or
the
required
information
is
included
in
the
financial
statements
or
notesthereto.







3.




Exhibits







See
Item
15(b)
below.
Each
management
contract
or
compensating
plan
or
arrangement
required
to
be
filed
has
been
identified.(b)Exhibits141ExhibitNumber
Description
2.1
Agreement
and
Plan
of
Merger,
dated
September
4,
2014,
by
and
among
Veracyte,
Inc.,
Full
MoonAcquisition,
Inc.,
Allegro
Diagnostics
Corp.,
Andrey
Zarur,
as
the
Stockholders'
Agent,
Kodiak
Venture
PartnersIII,
L.P.,
Kodiak
III
Entrepreneurs
Fund,
L.P.
and
Catalyst
Health
Ventures
L.P.
(incorporated
by
reference
toExhibit
2.1
to
the
Registrant's
Form
10-Q
for
the
quarterly
period
ended
September
30,
2014).





3.1
Restated
Certificate
of
Incorporation
of
the
Registrant
(incorporated
by
reference
to
Exhibit
3.1
to
the
Registrant'sCurrent
Report
on
Form
8-K
filed
November
8,
2013).





3.2
Amended
and
Restated
Bylaws
of
the
Registrant
(incorporated
by
reference
to
Exhibit
3.2
to
the
Registrant'sCurrent
Report
on
Form
8-K
filed
November
8,
2013).





4.1
Form
of
Common
Stock
Certificate
(incorporated
by
reference
to
Exhibit
4.1
to
the
Registrant's
RegistrationStatement
on
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





4.2
Second
Amended
and
Restated
Investors
Rights
Agreement,
dated
November
6,
2012,
between
the
Registrant
andcertain
investors
(incorporated
by
reference
to
Exhibit
4.2
to
the
Registrant's
Registration
Statement
on
Form
S-1(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





4.3
Amendment
to
Second
Amended
and
Restated
Investors
Rights
Agreement,
dated
June
14,
2013,
between
theRegistrant
and
certain
investors
(incorporated
by
reference
to
Exhibit
4.3
to
the
Registrant's
RegistrationStatement
on
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





4.4
Registration
Rights
Agreement,
dated
as
of
April
22,
2015,
by
and
among
the
several
purchasers
signatory
theretoand
the
Registrant
(incorporated
by
reference
to
Exhibit
10.2
to
the
Registrant's
Current
Report
on
Form
8-K
filedApril
24,
2015).


Table
of
Contents142ExhibitNumber
Description
10.1#Form
of
Indemnification
Agreement
between
the
Registrant
and
its
officers
and
directors
(incorporated
byreference
to
Exhibit
10.1
to
the
Registrant's
Registration
Statement
on
Form
S-1
(File
No.
333-191282),
asamended,
declared
effective
on
October
29,
2013).





10.2#2008
Stock
Plan
and
forms
of
agreements
thereunder
(incorporated
by
reference
to
Exhibit
10.2
to
the
Registrant'sRegistration
Statement
on
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





10.3#2013
Stock
Incentive
Plan
and
forms
of
agreements
thereunder
(incorporated
by
reference
to
Exhibit
10.3
to
theRegistrant's
Registration
Statement
on
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
onOctober
29,
2013).





10.4#Veracyte,
Inc.
Employee
Stock
Purchase
Plan
(incorporated
by
reference
to
Exhibit
10.1
to
the
Registrant'sQuarterly
Report
on
Form
10-Q
for
the
quarterly
period
ended
June
30,
2015,
as
amended).





10.5
Lease
Agreement
dated
as
of
February
10,
2010
between
ARE-San
Francisco
No
17,
LLC
and
the
Registrant(incorporated
by
reference
to
Exhibit
10.4
to
the
Registrant's
Registration
Statement
on
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





10.6
First
Amendment
to
Lease
Agreement
entered
into
as
of
July
11,
2012
between
ARE-San
Francisco
No
17,
LLCand
the
Registrant
(incorporated
by
reference
to
Exhibit
10.5
to
the
Registrant's
Registration
Statement
onForm
S-1
(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





10.7
Lease
Agreement
between
Riata
Holdings,
L.P.,
as
landlord,
and
the
Registrant,
as
tenant,
dated
November
28,2012
(incorporated
by
reference
to
Exhibit
10.6
to
the
Registrant's
Registration
Statement
on
Form
S-1
(FileNo.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





10.8
First
Amendment
to
Lease
Agreement
dated
as
of
January
7,
2014
by
and
between
Riata
Holdings,
L.P.
and
theRegistrant
(incorporated
by
reference
to
Exhibit
10.7
to
the
Registrant's
Annual
Report
on
Form
10-K
for
the
yearended
December
31,
2013
filed
March
20,
2014).





10.9
Office
Building
Lease
by
and
between
American
Fund
US
Investments
LP
and
the
Registrant
dated
April
29,2015
(incorporated
by
reference
to
Exhibit
10.2
to
the
Registrant's
Quarterly
Report
on
Form
10-Q
for
thequarterly
period
ended
June
30,
2015,
as
amended).





10.10#Employment
Agreement,
dated
as
of
February
15,
2008,
between
Bonnie
Anderson
and
the
Registrant(incorporated
by
reference
to
Exhibit
10.10
to
the
Registrant's
Registration
Statement
on
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





10.11#Amendment
to
Bonnie
Anderson
Employment
Agreement,
dated
as
of
December
22,
2008,
between
BonnieAnderson
and
the
Registrant
(incorporated
by
reference
to
Exhibit
10.11
to
the
Registrant's
Registration
Statementon
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





10.12#Amendment
No.
2
to
Bonnie
Anderson
Employment
Agreement,
effective
as
of
March
11,
2009,
between
BonnieAnderson
and
the
Registrant
(incorporated
by
reference
to
Exhibit
10.12
to
the
Registrant's
Registration
Statementon
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).Table
of
Contents143ExhibitNumber
Description
10.13#Amended
and
Restated
Change
of
Control
and
Severance
Agreement,
effective
as
of
May
14,
2015,
betweenBonnie
Anderson
and
the
Registrant
(incorporated
by
reference
to
Exhibit
10.1
to
the
Registrant's
QuarterlyReport
on
Form
10-Q
for
the
quarterly
period
ended
March
31,
2015,
as
amended).





10.14#Amended
and
Restated
Change
of
Control
and
Severance
Agreement,
effective
as
of
May
14,
2015,
betweenChristopher
Hall
and
the
Registrant
(incorporated
by
reference
to
Exhibit
10.3
to
the
Registrant's
Quarterly
Reporton
Form
10-Q
for
the
quarterly
period
ended
March
31,
2015,
as
amended).





10.15#Amended
and
Restated
Change
of
Control
and
Severance
Agreement,
effective
as
of
May
14,
2015,
betweenShelly
Guyer
and
the
Registrant
(incorporated
by
reference
to
Exhibit
10.2
to
the
Registrant's
Quarterly
Report
onForm
10-Q
for
the
quarterly
period
ended
March
31,
2015,
as
amended).





10.16#Amended
and
Restated
Change
of
Control
and
Severance
Agreement,
effective
as
of
May
14,
2015,
between
JulieBrooks
and
the
Registrant
(incorporated
by
reference
to
Exhibit
10.4
to
the
Registrant's
Quarterly
Report
onForm
10-Q
for
the
quarterly
period
ended
March
31,
2015,
as
amended).





10.17#Offer
Letter
dated
as
of
April
8,
2013
with
Shelly
D.
Guyer
(incorporated
by
reference
to
Exhibit
10.17
to
theRegistrant's
Registration
Statement
on
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
onOctober
29,
2013).





10.18#Offer
Letter
dated
as
of
January
28,
2010
with
Christopher
M.
Hall
(incorporated
by
reference
to
Exhibit
10.18
tothe
Registrant's
Registration
Statement
on
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
onOctober
29,
2013).





10.19†Pathology
Services
Agreement
dated
as
of
November
12,
2010
between
Brazos
Valley
Pathology,
P.A.
D/B/AReitpath
and
the
Registrant
(incorporated
by
reference
to
Exhibit
10.19
to
the
Registrant's
Registration
Statementon
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





10.20
Approval
of
the
Registrant
to
the
Assignment
of
the
Pathology
Services
Agreement
with
Brazos
Valley
Pathologyto
Thyroid
Cytopathology
Partners,
P.A.
as
of
May
18,
2011
(incorporated
by
reference
to
Exhibit
10.20
to
theRegistrant's
Registration
Statement
on
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
onOctober
29,
2013).





10.21
First
Amendment
to
Pathology
Services
Agreement
dated
as
of
December
19,
2012
between
ThyroidCytopathology
Partners,
P.A.
and
the
Registrant
(incorporated
by
reference
to
Exhibit
10.21
to
the
Registrant'sRegistration
Statement
on
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





10.22
Second
Amendment
to
Pathology
Services
Agreement
dated
as
of
January
1,
2014
by
and
between
the
Registrantand
Thyroid
Cytopathology
Partners,
P.A.
(incorporated
by
reference
to
Exhibit
10.23
to
the
Registrant's
AnnualReport
on
Form
10-K
for
the
year
ended
December
31,
2013).





10.23
Loan
and
Security
Agreement
dated
as
of
June
26,
2013
between
Silicon
Valley
Bank
and
the
Registrant(incorporated
by
reference
to
Exhibit
10.9
to
the
Registrant's
Registration
Statement
on
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).


Table
of
Contents144ExhibitNumber
Description
10.24
Consent
and
First
Amendment
to
Loan
and
Security
Agreement
dated
as
of
December
18,
2014
between
SiliconValley
Bank
and
the
Registrant
(incorporated
by
reference
to
Exhibit
10.1
to
the
Registrant's
Current
Report
onForm
8-K
filed
December
18,
2014).





10.25
Consent
and
Second
Amendment
to
Loan
and
Security
Agreement
dated
as
of
November
24,
2015
betweenSilicon
Valley
Bank
and
the
Registrant
(incorporated
by
reference
to
Exhibit
10.1
to
the
Registrant's
CurrentReport
on
Form
8-K
filed
November
24,
2015).





10.26†Co-promotion
Agreement
dated
as
of
January
18,
2012
between
Genzyme
Corporation
and
the
Registrant(incorporated
by
reference
to
Exhibit
10.7
to
the
Registrant's
Registration
Statement
on
Form
S-1
(File
No.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





10.27
Amendment
to
Co-promotion
Agreement,
effective
April
9,
2013,
between
Genzyme
Corporation
and
theRegistrant
(incorporated
by
reference
to
Exhibit
10.8
to
the
Registrant's
Registration
Statement
on
Form
S-1
(FileNo.
333-191282),
as
amended,
declared
effective
on
October
29,
2013).





10.28†Amended
and
Restated
U.S.
Co-Promotion
Agreement
between
the
Registrant
and
Genzyme
Corporation(incorporated
by
reference
to
Exhibit
10.1
to
the
Registrant's
Form
10-Q
for
the
quarterly
period
endedSeptember
30,
2014).





10.29†Ex-U.S.
Co-Promotion
Agreement
between
the
Registrant
and
Genzyme
Corporation
(incorporated
by
referenceto
Exhibit
10.26
to
the
Registrant's
Annual
Report
Form
10-K
for
the
year
ended
December
31,
2015,
asamended).





23.1*Consent
of
Ernst
&
Young
LLP,
Independent
Registered
Public
Accounting
Firm.





23.2*Consent
of
PricewaterhouseCoopers
LLP,
Independent
Registered
Public
Accounting
Firm.





24.1*Power
of
Attorney
(see
the
signature
page
of
this
Annual
Report
on
Form
10-K).





31.1*Principal
Executive
Officer's
Certification
Pursuant
to
Section
302
of
the
Sarbanes-Oxley
Act
of
2002.





31.2*Principal
Financial
Officer's
Certification
Pursuant
to
Section
302
of
the
Sarbanes-Oxley
Act
of
2002.





32.1**Certification
Pursuant
to
18
U.S.C.
§
1350
(Section
906
of
the
Sarbanes-Oxley
Act
of
2002).





32.2**Certification
Pursuant
to
18
U.S.C.
§
1350
(Section
906
of
the
Sarbanes-Oxley
Act
of
2002).





101.INS
XBRL
Instance
Document





101.SCH
XBRL
Taxonomy
Extension
Schema





101.CAL
XBRL
Taxonomy
Extension
Calculation
Linkbase





101.DEF
XBRL
Taxonomy
Extension
Definition
Linkbase





101.LAB
XBRL
Taxonomy
Extension
Label
Linkbase





101.PRE
XBRL
Taxonomy
Extension
Presentation
Linkbase†Confidential
treatment
has
been
granted
with
respect
to
certain
portions
of
this
Exhibit.
#Indicates
management
contract
or
compensatory
plan
or
arrangement.Table
of
ContentsCopies
of
the
above
exhibits
not
contained
herein
are
available
to
any
stockholder,
upon
payment
of
a
reasonable
per
page
fee,
upon
written
request
to:
ChiefFinancial
Officer,
Veracyte,
Inc.,
6000
Shoreline
Court,
Suite
300,
South
San
Francisco,
California
94080.(c)Financial
Statement
Schedules







Reference
is
made
to
Item
15(a)
2
above.145*Filed
herewith.
**In
accordance
with
Item
601(b)(32)(ii)
of
Regulation
S-K
and
SEC
Release
No.
34-47986,
the
certifications
furnished
in
Exhibits
32.1
and32.2
hereto
are
deemed
to
accompany
this
Form
10-K
and
will
not
be
deemed
"filed"
for
purposes
of
Section
18
of
the
Securities
ExchangeAct
of
1934
(the
"Exchange
Act")
or
deemed
to
be
incorporated
by
reference
into
any
filing
under
the
Exchange
Act
or
the
Securities
Actof
1933
except
to
the
extent
that
the
registrant
specifically
incorporates
it
by
reference.Table
of
ContentsSIGNATURES








Pursuant
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
on
its
behalfby
the
undersigned,
thereunto
duly
authorized.Date:
March
14,
2016POWER
OF
ATTORNEY








KNOW
ALL
PERSONS
BY
THESE
PRESENT,
that
each
person
whose
signature
appears
below
constitutes
and
appoints
Bonnie
H.
Anderson
and
Shelly
D.Guyer,
and
each
of
them,
his
true
and
lawful
attorneys-in-fact,
each
with
full
power
of
substitution,
for
him
or
her
in
any
and
all
capacities,
to
sign
anyamendments
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
andExchange
Commission,
hereby
ratifying
and
confirming
all
that
each
of
said
attorneys-in-fact
or
their
substitute
or
substitutes
may
do
or
cause
to
be
done
by
virtuehereof.







Pursuant
to
the
requirements
of
the
Securities
Exchange
Act
of
1934,
this
report
has
been
signed
below
by
the
following
persons,
on
behalf
of
the
registrant
onthe
dates
and
the
capacities
indicated.146

VERACYTE,
INC.

By:
/s/
BONNIE
H.
ANDERSON
Bonnie
H.
Anderson
President and Chief Executive OfficerSignature
Title
Date




/s/
BONNIE
H.
ANDERSON
Bonnie
H.
Anderson
President,
Chief
Executive
Officer
(PrincipalExecutive
Officer)
and
Director
March
14,
2016/s/
SHELLY
D.
GUYER
Shelly
D.
Guyer
Chief
Financial
Officer
(Principal
Financial
andAccounting
Officer)
March
14,
2016/s/
BRIAN
G.
ATWOOD
Brian
G.
Atwood
Chairman
of
Board
of
Directors
March
14,
2016/s/
JOHN
L.
BISHOP
John
L.
Bishop
Director
March
14,
2016/s/
FRED
E.
COHEN,
M.D.,
D.PHIL.
Fred
E.
Cohen,
M.D.,
D.Phil.
Director
March
14,
2016Table
of
Contents147Signature
Title
Date




/s/
KARIN
EASTHAM
Karin
Eastham
Director
March
14,
2016/s/
ROBERT
S.
EPSTEIN
Robert
S.
Epstein
Director
March
14,
2016/s/
EVAN
JONES
Evan
Jones
Director
March
14,
2016/s/
TINA
S.
NOVA,
PH.D.
Tina
S.
Nova,
Ph.D.
Director
March
14,
2016/s/
JESSE
I.
TREU,
PH.D.
Jesse
I.
Treu,
Ph.D.
Director
March
14,
2016QuickLinks
--
Click
here
to
rapidly
navigate
through
this
documentExhibit
23.1
CONSENT
OF
ERNST
&
YOUNG
LLP,
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRM








We
consent
to
the
incorporation
by
reference
in
the
following
Registration
Statements:(1)Registration
Statements
(Forms
S-8
Nos.
333-191992,
333-203097
and
333-205206)
pertaining
to
the
2013
Stock
Incentive
Plan,
2008
Stock
Planand
Employee
Stock
Purchase
Plan
of
Veracyte,
Inc.,
and
(2)Registration
Statements
(Forms
S-3
Nos.
333-204368
and
333-205204);of
our
report
dated
March
14,
2016,
with
respect
to
the
financial
statements
of
Veracyte,
Inc.
included
in
this
Annual
Report
(Form
10-K)
of
Veracyte,
Inc.
for
theyear
ended
December
31,
2015./s/
Ernst
&
Young
LLPRedwood
City,
California
March
14,
2016QuickLinks
Exhibit
23.1
CONSENT
OF
ERNST
&
YOUNG
LLP,
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRM
QuickLinks
--
Click
here
to
rapidly
navigate
through
this
documentExhibit
23.2
CONSENT
OF
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRM








We
hereby
consent
to
the
incorporation
by
reference
in
the
Registration
Statements
on
Form
S-8
(Nos.
333-191992,
333-203097
and
333-205206)
and
theRegistration
Statements
on
Form
S-3
(Nos.
333-204368
and
333-205204)
of
Veracyte,
Inc.
of
our
report
dated
March
20,
2014
relating
to
the
financial
statementsof
Veracyte,
Inc.,
which
appears
in
this
Form
10-K./s/
PricewaterhouseCoopers
LLPSan
Jose,
California
March
14,
2016QuickLinks
Exhibit
23.2
CONSENT
OF
INDEPENDENT
REGISTERED
PUBLIC
ACCOUNTING
FIRM
QuickLinks
--
Click
here
to
rapidly
navigate
through
this
documentExhibit
31.1
PRINCIPAL
EXECUTIVE
OFFICER'S
CERTIFICATION
PURSUANT
TO
SECTION
302
OF
THE
SARBANES-OXLEY
ACT
OF
2002
I,
Bonnie
Anderson,
certify
that:







1.




I
have
reviewed
this
annual
report
on
Form
10-K
of
Veracyte,
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
this
report;







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(s)
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
theregistrant
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
subsidiaries,
is
made
known
to
us
by
others
within
those
entities,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
for
external
purposesin
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
annual
report)
that
has
materially
affected,
or
is
reasonably
likely
to
materially
affect,the
registrant's
internal
control
over
financial
reporting;
and







5.




The
registrant's
other
certifying
officer(s)
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
14,
2016

/s/
BONNIE
H.
ANDERSON
Bonnie
H.
Anderson
President and Chief Executive Officer (Principal Executive Officer)QuickLinks
Exhibit
31.1
PRINCIPAL
EXECUTIVE
OFFICER'S
CERTIFICATION
PURSUANT
TO
SECTION
302
OF
THE
SARBANES-OXLEY
ACT
OF
2002
QuickLinks
--
Click
here
to
rapidly
navigate
through
this
documentExhibit
31.2
PRINCIPAL
FINANCIAL
OFFICER'S
CERTIFICATION
PURSUANT
TO
SECTION
302
OF
THE
SARBANES-OXLEY
ACT
OF
2002
I,
Shelly
Guyer,
certify
that:







1.




I
have
reviewed
this
annual
report
on
Form
10-K
of
Veracyte,
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
this
report;







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(s)
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
theregistrant
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
subsidiaries,
is
made
known
to
us
by
others
within
those
entities,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
for
external
purposesin
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
annual
report)
that
has
materially
affected,
or
is
reasonably
likely
to
materially
affect,the
registrant's
internal
control
over
financial
reporting;
and







5.




The
registrant's
other
certifying
officer(s)
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
14,
2016


/s/
SHELLY
D.
GUYER
Shelly
D.
Guyer
Chief Financial Officer (Principal Financial and Accounting Officer)QuickLinks
Exhibit
31.2
PRINCIPAL
FINANCIAL
OFFICER'S
CERTIFICATION
PURSUANT
TO
SECTION
302
OF
THE
SARBANES-OXLEY
ACT
OF
2002
QuickLinks
--
Click
here
to
rapidly
navigate
through
this
documentExhibit
32.1
CERTIFICATION
PURSUANT
TO
18
U.S.C.
SECTION
1350,
AS
ADOPTED
PURSUANT
TO
SECTION
906
OF
THE
SARBANES-OXLEY
ACT
OF
2002








In
connection
with
the
annual
report
of
Veracyte,
Inc.
(the
"Company")
on
Form
10-K
for
the
year
ended
December
31,
2015,
as
filed
with
the
Securities
andExchange
Commission
on
the
date
hereof
(the
"Report"),
the
undersigned
officer
of
the
Company
certifies,
pursuant
to
18
U.S.C.
Section
1350,
as
adoptedpursuant
to
Section
906
of
the
Sarbanes-Oxley
Act
of
2002,
that,
to
such
officer's
knowledge:







(1)


The
Report
fully
complies
with
the
requirements
of
Section
13(a)
or
15(d)
of
the
Securities
Exchange
Act
of
1934;
and







(2)


The
information
contained
in
the
Report
fairly
presents,
in
all
material
respects,
the
financial
condition
and
results
of
operations
of
the
Company.Date:
March
14,
2016

/s/
BONNIE
H.
ANDERSON
Bonnie
H.
Anderson
President and Chief Executive Officer (Principal Executive Officer)QuickLinks
Exhibit
32.1
CERTIFICATION
PURSUANT
TO
18
U.S.C.
SECTION
1350,
AS
ADOPTED
PURSUANT
TO
SECTION
906
OF
THE
SARBANES-OXLEY
ACT
OF
2002
QuickLinks
--
Click
here
to
rapidly
navigate
through
this
documentExhibit
32.2
CERTIFICATION
PURSUANT
TO
18
U.S.C.
SECTION
1350,
AS
ADOPTED
PURSUANT
TO
SECTION
906
OF
THE
SARBANES-OXLEY
ACT
OF
2002








In
connection
with
the
annual
report
of
Veracyte,
Inc.
(the
"Company")
on
Form
10-K
for
the
year
ended
December
31,
2015,
as
filed
with
the
Securities
andExchange
Commission
on
the
date
hereof
(the
"Report"),
the
undersigned
officer
of
the
Company
certifies,
pursuant
to
18
U.S.C.
Section
1350,
as
adoptedpursuant
to
Section
906
of
the
Sarbanes-Oxley
Act
of
2002,
that,
to
such
officer's
knowledge:







(1)


The
Report
fully
complies
with
the
requirements
of
Section
13(a)
or
15(d)
of
the
Securities
Exchange
Act
of
1934;
and







(2)


The
information
contained
in
the
Report
fairly
presents,
in
all
material
respects,
the
financial
condition
and
results
of
operations
of
the
Company.Date:
March
14,
2016

/s/
SHELLY
D.
GUYER
Shelly
D.
Guyer
Chief Financial Officer (Principal Financial and Accounting Officer)QuickLinks
Exhibit
32.2
CERTIFICATION
PURSUANT
TO
18
U.S.C.
SECTION
1350,
AS
ADOPTED
PURSUANT
TO
SECTION
906
OF
THE
SARBANES-OXLEY
ACT
OF
2002