Veracyte

2019 Annual Report

Dear Shareholders,

2019 was a transformational year in our mission to improve diagnosis and treatment decisions throughout
the patient journey. Key highlights included strong revenue and volume growth; advancing our first-of-its-
kind, non-invasive nasal swab test for early lung cancer detection; and completing a strategic acquisition
that positions us for global expansion on our own distributed platform with an expanding menu of
advanced genomic tests in oncology and other diseases.

We are particularly excited about the December 2019 acquisition of the exclusive global diagnostic rights
to the NanoString nCounter FLEX Analysis System. This move positions us to deliver our current and
pipeline advanced genomic tests to physicians and their patients via hospital and clinical laboratories
throughout the European Union and other parts of the world – enabling us to access an estimated $40
billion global market. Our test menu was also expanded with the addition of the Prosigna breast cancer
test and the in-development LymphMark lymphoma subtyping test, which were included in the acquisition.

Our key accomplishments in 2019 and early 2020 include:

Strong Commercial Growth



Achieved strong revenue growth across our genomic testing and product portfolio, delivering
$108.3 million for the year, with total revenue – including from biopharma collaborations – of
$120.4 million.

 Grew total genomic volume (for the Afirma, Percepta and Envisia classifiers) by 25% to 39,612

tests for the year.

The Lancet Respiratory Medicine

 Received final Medicare coverage for Envisia and published strong clinical validation and utility
, which together fueled the test’s successful nationwide

data in
expansion for improved diagnosis of idiopathic pulmonary fibrosis and other interstitial lung
diseases.
Strengthened the clinical evidence for all of our genomic tests, including 11 abstracts for the
Prosigna breast cancer test, which were presented at the San Antonio Breast Cancer Symposium
in December 2019.



Biopharmaceutical Collaborations





Announced a long-term strategic collaboration with Johnson & Johnson Innovation LLC in
January 2019 to advance development of novel diagnostic tests for early lung cancer detection.
In March 2020, formed a multi-year collaboration with Acerta Pharma, the hematology research
development arm of AstraZeneca plc, to support the biopharmaceutical company’s development
of oncology therapeutics in lymphoma.

Pipeline Advancement





Presented compelling preliminary data at the American College of Chest Physicians (CHEST)
annual meeting for the first noninvasive nasal swab classifier for improved lung cancer diagnosis.
Launched the second-generation Percepta Genomic Sequencing Classifier, completing the
transition of our core classifiers to our RNA whole-transcriptome sequencing platform.

Responding to the evolving COVID-19 pandemic, Veracyte took swift action to protect our employees and
the broader community, while ensuring our ability to deliver our genomic test results to physicians and
their patients who need them. Our CLIA lab is running and most of our employees are working remotely.
We believe we will emerge strong over the long-term due to the fundamental strength and diversification
of our business and our strong cash position. Importantly, our focus on improving diagnosis and treatment
decisions, while reducing unnecessary procedures, aligns with critical healthcare system priorities.

Looking ahead, we remain focused in 2020 on advancing our global vision as we prepare to launch three
significant new products in 2021: our nasal swab test for lung cancer in the United States, the Envisia
classifier on the nCounter system in international markets and the Percepta Atlas to inform treatment
decisions at the time of lung cancer diagnosis. We look forward to keeping you apprised of our progress
throughout the year.

In closing, I would like to thank our employees, whose positive attitudes, drive and focus are key to our
success and inspire me each day. And, finally, thank you to you, our shareholders, for your ongoing
support of our mission and our team.

Warm Regards,

Bonnie H. Anderson
Chairman and Chief Executive Officer

April 15, 2020

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)

☒

☐

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

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

For the fiscal year ended December 31, 2019 or

For the transition period from

to

Commission File Number 001-36156

VERACYTE, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware

(State or Other Jurisdiction of
Incorporation or Organization)

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

Common Stock, par value, $0.001 per share

Trading Symbol(s)
VCYT

Name of each exchange on which registered

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 ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the 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 requirements
for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of

Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or

emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in
Rule 12b-2 of the Exchange Act.

Large accelerated filer
Non-accelerated filer

☒
☐

Accelerated filer
Smaller reporting company
Emerging growth company

☐
☐
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any

new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of June 30, 2019, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $1.3 billion, 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 February 20, 2020 was 49,738,822.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the
registrant's 2020 Annual Meeting of Stockholders to be held on or about June 5, 2020 are incorporated herein by reference in Part III of this Annual Report on
Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal
year ended December 31, 2019.

.

TABLE OF CONTENTS

Item No.
PART I
Item 1. Business

Item 1A. Risk Factors

Item 1B. Unresolved Staff Comments

Item 2. Properties

Item 3. Legal Proceedings

Item 4. Mine Safety Disclosure

PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6. Selected Financial Data

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

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

Item 9A. Controls and Procedures

Item 9B. Other Information

PART III
Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

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

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

Item 14. Principal Accountant Fees and Services

PART IV
Item 15. Exhibits, Financial Statement Schedules

Item 16. Form 10-K Summary

SIGNATURES

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Table of Contents

ITEM 1. BUSINESS

PART I

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
When used in this report, the words "expects," "anticipates," "intends," "estimates," "plans," "believes," "continuing," "ongoing,"
and similar expressions are intended to identify forward-looking statements. These are statements that relate to future events and
include, but are not limited to, the factors that may impact our financial results; our expectations regarding revenue; our expectations
with respect to our future research and development, general and administrative and selling and marketing expenses and our
anticipated uses of our funds; our beliefs with respect to the optimization of our processes for the analysis of ribonucleic acid, or
RNA, samples; our integration of the assets acquired from NanoString Technologies, Inc.; our ability to deploy the nCounter FLEX
Analysis System successfully and run our tests on this platform worldwide; our collaboration with Johnson & Johnson Services,
Inc., or Johnson & Johnson; our belief in the importance of maintaining libraries of clinical evidence; our expectations regarding
capital expenditures; our anticipated cash needs and our estimates regarding our capital requirements; the timing and success of
our transition to a single platform for all of our classifiers and tests; our ability to obtain Medicare coverage for our tests; our need
for additional financing; potential future sources of cash; our business strategy and our ability to execute our strategy; our ability
to achieve and maintain reimbursement from third-party payers at acceptable levels and our expectations regarding the timing of
reimbursement; the estimated size of the global markets for our tests; the estimated number of patients who receive uncertain
diagnoses who are candidates for our test; the attributes and potential benefits of our tests and any future tests we may develop to
patients, physicians and payers; the factors we believe drive demand for and reimbursement of our tests; our ability to sustain or
increase demand for our tests; our intent to expand into other clinical areas; our ability to develop new tests, and the timeframes
for development or commercialization; our ability to get our data and clinical studies accepted in peer-reviewed publications; our
dependence on and the terms of our strategic relationships, and the success of those relationships; our beliefs regarding our
laboratory capacity; the applicability of clinical results to actual outcomes; our expectations regarding our international expansion;
the occurrence, timing, outcome or success of clinical trials or studies; the ability of our tests to impact treatment decisions; our
beliefs regarding our competitive position; our compliance with federal, state and international regulations; the potential impact
of regulation of our tests by the Food and Drug Administration, or FDA, or other regulatory bodies; the impact of new or changing
policies, regulation or legislation, or of judicial decisions, on our business; the impact of seasonal fluctuations and economic
conditions on our business; our belief that we have taken reasonable steps to protect our intellectual property; our belief that our
intellectual property will develop and maintain our competitive position; the impact of accounting pronouncements and our critical
accounting policies, judgments, estimates, models and assumptions on our financial results; and anticipated trends and challenges
in our business and the markets in which we operate. We caution you that the foregoing list does not contain all of the forward-
looking statements made in this report.

Forward-looking statements are based on our current plans and expectations and involve risks and uncertainties which could
cause actual results to differ materially. These risks and uncertainties include, but are not limited to, those risks discussed in Part I,
Item 1A of this report. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation
or undertaking to update any forward-looking statements contained herein to reflect any change in our expectations with regard
thereto or any change in events, conditions or circumstances on which any such statement is based.

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

Veracyte,Afirma, Percepta, Envisia, Prosigna, LymphMark, and Know by Design, and the Veracyte,Afirma, Percepta, Envisia
and Prosigna logos are our trademarks. We also refer to trademarks of other corporations or organizations in this report that are
the property of their respective owners.

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

1

General

We are a leading genomic diagnostics company that is creating value through innovation. We were founded in 2008 with a
mission of improving diagnostic accuracy. Today, our growing menu of tests leverage advances in genomic science and technology
to improve care throughout the patient journey, enabling more confident diagnostic, prognostic and treatment decisions in cancer
and other challenging diseases. We are creating new standards of care by enabling more patients to avoid risks of unnecessary
invasive procedures and removing costs from the healthcare system, while expediting the time to diagnosis and treatment decisions.

We perform our genomic tests for thyroid cancer, lung cancer and idiopathic pulmonary fibrosis, or IPF, in our CLIA-certified
laboratory in South San Francisco, California. In December 2019, we announced our acquisition from NanoString Technologies,
Inc., or NanoString, of an exclusive global diagnostics license to the nCounter® FLEX Analysis System, as well as the Prosigna®
breast cancer prognostic gene signature assay, which is commercially available, and the LymphMark™ lymphoma subtyping assay,
which is in development. Both tests are designed for use on the nCounter system. We believe this strategic transaction positions
us to expand our business globally with a broad menu of advanced genomic tests that may be offered as distributed kits and
performed in local laboratories worldwide. We believe our current and pipeline products address a collective $40 billion global
market.

We develop our genomic tests to answer specific clinical questions, providing patients and physicians with a clear path
forward in their diagnostic and treatment journey. We use advanced scientific methods, such as RNA whole-transcriptome
sequencing and machine learning, to develop our tests and optimize the assay and classifier results for the platform on which the
test will be performed. Historically, that platform has been RNA sequencing, performed in our CLIA lab. In the future, we expect
this to also include the nCounter platform for international distribution of our tests.

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

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

We believe our powerful scientific platform provides multiple vectors to create value for patients, providers and payers, as

well as stockholders, and to help advance precision medicine:

•

•

•

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

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

High-Performing Commercial Genomic Tests - With the exception of Prosigna, which competes with a first-to-market
test in a highly competitive environment, our genomic tests generally serve large, untapped markets where they are
changing the diagnostic and treatment paradigm for patients. We believe the nCounter platform affords us the opportunity
to extend our business model on a global basis by enabling the development of a broad menu of tests. The platform is
expected to be applicable to laboratories worldwide. Separately, we expect the nCounter platform may provide increased
efficiency in our United States-based CLIA lab.

2

We currently offer five commercialized genomic tests that are changing disease diagnosis and patient care. All five tests are
available in the United States and one is available internationally. These include the Afirma® Genomic Sequencing Classifier, or
GSC (its predecessor was the Afirma Gene Expression Classifier, or GEC) for thyroid cancer; the Percepta® GSC (its predecessor
was the Percepta Bronchial Genomic Classifier) for lung cancer; the Envisia® Genomic Classifier for IPF; the Afirma Xpression
Atlas, which provides information on the most common and emerging gene alterations associated with thyroid cancer, enabling
physicians to confidently tailor surgical and treatment decisions at time of diagnosis; and the Prosigna breast cancer test for
assessing risk of distant recurrence, which is available for use on the nCounter platform in the United States and internationally.

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

Our collaboration with the Lung Cancer Initiative at Johnson & Johnson has helped accelerate two of our key lung cancer
programs: (i) commercialization of the Percepta GSC on our RNA whole-transcriptome sequencing platform, and (ii) development
of the first non-invasive nasal swab test for early lung cancer detection. We began making the Percepta GSC available to customers
in June 2019. In October 2019, we announced preliminary data for our nasal swab classifier, which demonstrated the test’s potential
to identify patients at low risk of lung cancer so they can potentially avoid unnecessary procedures and those at high risk so they
can receive prompt diagnosis and treatment.

3

The published evidence supporting our tests demonstrates the robustness of our science and clinical studies, which we believe
is key to driving adoption and reimbursement. Patients and physicians can access our full list of publications on our website. Over
45 clinical studies covering our products have been published, including three landmark clinical validation papers published in
The New England Journal of Medicine for theAfirma and Percepta classifiers, respectively, and in The Lancet Respiratory Medicine
for the Envisia classifier. We continue to build upon our extensive library of clinical evidence.

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

We also expect to continue expanding our offerings in thyroid cancer, lung cancer, interstitial lung diseases such as IPF,
breast cancer and lymphoma, as well as other indications that we believe will benefit from our technology and approach. Our
product development pipelines address what we believe to be significant market opportunities for addressing clinical questions in
early detection, diagnosis, staging/prognosis, therapy selection/surgery and disease monitoring across the aforementioned
indications.

Patients access our tests through their physician. Our Afirma, Percepta and Envisia tests are used as part of the diagnostic
process and genomic testing services are performed in our CLIA laboratory located in San Francisco, California. We perform slide
preparation and staining for cytopathology on fine needle aspiration samples, for use withAfirma testing, in our reference laboratory
in Austin, Texas. The Prosigna test is an in vitro diagnostic test that is performed on the nCounter FLEX Analysis System in
laboratories worldwide, as well as in the United States.

Company Background

We were incorporated in Delaware as Calderome, Inc. in August 2006. Calderome operated as an incubator until early 2008.
We changed our name to Veracyte, Inc. in March 2008. Our principal executive offices are located at 6000 Shoreline Court,
Suite 300, South San Francisco, California 94080 and our telephone number is (650) 243-6300. Our website address is
www.veracyte.com. Our website and the information contained therein or connected thereto are not intended to be incorporated
into 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 and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such
materials to the Securities and Exchange Commission, or SEC. The reports are also available at www.sec.gov.

Fourth Quarter and Full-Year 2019 Financial Results

For the three months ended December 31, 2019, compared to the prior year:

•
•
•
•
•
•
•

Total Revenue was $29.7 million, an increase of 15%;
Gross Margin was 66%, unchanged;
Operating Expenses, Excluding Cost of Revenue, were $27.8 million, an increase of 38%;
Net Loss and Comprehensive Loss was ($7.5) million, an increase of 140%;
Basic and Diluted Net Loss Per Common Share was ($0.15), an increase of 88%;
Net Cash Provided by Operating Activities was $1.8 million, compared to $1.2 million used; and
Cash and Cash Equivalents was $159.3 million at December 31, 2019.

For the year ended December 31, 2019, compared to the prior year:

•
•
•
•
•
•

Total Revenue was $120.4 million, an increase of 31%;
Gross Margin was 70%, an increase of six percentage points;
Operating Expenses, Excluding Cost of Revenue, were $99.0 million, an increase of 22%;
Net Loss and Comprehensive Loss was ($12.6) million, an improvement of 45%;
Basic and Diluted Net Loss Per Common Share was ($0.27), an improvement of 56%; and
Net Cash Used in Operating Activities was $3.2 million, an improvement of 76%.

4

2019 Full-Year and Recent Business Highlights

Commercial Growth:

•

•

•

•

•

•

•

•

Achieved strong total revenue growth across our testing and product portfolio delivering $29.5 million in the fourth
quarter and $108.3 million for 2019, an increase of 16% and 19%, respectively, compared to the prior year.
Accelerated pulmonology testing revenue to $2.0 million and $5.5 million for the fourth quarter and full year, respectively,
a 123% and 174% increase compared to prior year.
Grew total genomic volume (Afirma, Percepta and Envisia) by 18% to 10,846 tests in the fourth quarter of 2019 and by
25% to 39,612 tests in 2019, compared to prior year.
Increased genomic volume for our pulmonology products by 136% in 2019 compared to prior year, achieving growth
targets for both the Percepta and Envisia classifiers.
Received final Medicare coverage in March 2019 for the Envisia classifier and published strong clinical validation and
clinical utility data in The Lancet Respiratory Medicine, propelling nationwide commercial expansion of the test in the
second half of 2019.
Expanded payer contracts by 14.4 million lives, making Veracyte an in-network genomic testing provider to health plans
representing over 225 million members.
Continued to build an extensive library of clinical data across our portfolio in 2019, including 8 publications and 11
presentations at leading medical meetings, demonstrating our Afirma and pulmonology tests’ performance and clinical
utility.
Eleven abstracts were presented at the San Antonio Breast Cancer Symposium in December 2019, including data showing
a benefit of Prosigna® over other genomic testing to identify patients’ long-term risk of developing distant metastases.
In addition, data were presented showing the test’s ability to identify patients with intrinsic breast cancer subtypes that
may potentially benefit from CDK4/6 inhibitors in place of standard chemotherapy.

Biopharmaceutical Collaborations/Pipeline Advancement:

•

•

•

•

In January 2019, announced a long-term strategic collaboration with Johnson & Johnson Innovation LLC to advance the
development and commercialization of novel diagnostic tests to detect lung cancer at its earliest stages, when the disease
is most treatable.
Presented preliminary data at the American College of Chest Physicians (CHEST) annual meeting for our first-of-its-
kind noninvasive nasal swab classifier for improved lung cancer diagnosis. The test, being developed through our Johnson
& Johnson collaboration, is expected to launch in early 2021.
Launched the second-generation Percepta GSC, completing the transition of our core classifiers to our RNA whole-
transcriptome sequencing platform.
Announced a multi-year collaboration with Acerta Pharma, the hematology research and development arm of AstraZeneca
plc, to provide genomic information that will support the biopharmaceutical company’s development of oncology
therapeutics in lymphoma.

Global Expansion:

•

Acquired the exclusive global diagnostic rights to the NanoString nCounter FLEXAnalysis System, as well as the Prosigna
breast cancer assay and the in-development LymphMark lymphoma subtyping test. We believe this transaction positions
us to access a $40 billion global market for our current and pipeline products, by offering a broad menu of advanced
genomic tests in oncology and other indications using a distributed-kit model.

Our Products

We believe our focus on answering clinical questions that produce actionable results; our comprehensive scientific approach
to product development, including our use of RNA whole-transcriptome sequencing; and our development of rigorous clinical
evidence to establish our tests’performance and facilitate their reimbursement play critical roles in our ability to develop diagnostic
tests that change clinical care. We offer genomic tests in thyroid cancer, lung cancer, IPF and breast cancer:

• Afirma Genomic Sequencing Classifier and Xpression Atlas. Our Afirma offerings include the Afirma GSC and Xpression
Atlas. Our offerings are intended to provide physicians with clinically actionable results from a single fine needle aspiration,
or FNA, biopsy. The Afirma GSC was developed with RNA whole-transcriptome sequencing and machine learning, and is
used to identify patients with benign thyroid nodules among those with indeterminate cytopathology results in order to rule

5

out unnecessary thyroid surgery. The Afirma product is the first of its kind to market, and we believe the market leader. Since
Afirma testing became available in 2011, we estimate that we have helped more than 75,000 patients avoid having all or part
of their thyroids removed.

We commercially launched theAfirma XpressionAtlas in 2018 to complement theAfirma GSC. The XpressionAtlas provides
physicians with genomic alteration content from the same FNA samples that are used in Afirma GSC testing and may help
physicians decide with greater confidence on the surgical or therapeutic pathway for their patients. The Afirma Xpression
Atlas includes 761 DNA variants and 130 RNA fusion partners in over 500 genes that are associated with thyroid cancer.

• Percepta Genomic Sequencing Classifier. The Percepta classifier improves lung cancer diagnosis by enhancing the
performance of diagnostic bronchoscopies, thus identifying more patients with lung nodules who are at low risk of cancer
and may avoid further, invasive procedures. This second-generation test, developed on our RNA whole-transcriptome
sequencing platform and commercially introduced in June 2019, provides expanded clinical utility by identifying not only
low risk patients, but also those with a high risk of lung cancer, so they may obtain faster diagnosis and treatment. The test
is built upon foundational "field of injury" science - through which genomic changes associated with lung cancer in current
and former smokers can be identified with a simple brushing of a person's airway - without the need to sample the often
hard-to-reach nodule directly. The Percepta classifier is the first product of its kind to be available commercially and the first
to obtain Medicare coverage for improved lung cancer diagnosis.

• Envisia Genomic Classifier. The Envisia classifier improves diagnosis of IPF by helping physicians better differentiate IPF
from other interstitial lung diseases, or ILDs, without the need for surgery. The test identifies the genomic pattern of usual
interstitial pneumonia, or UIP, a hallmark of IPF, with high accuracy on patient samples that are obtained through
transbronchial biopsy, a nonsurgical procedure that is commonly used in lung evaluation. Obtaining an accurate, timely IPF
diagnosis is important given the availability of drugs that can slow the progression of this debilitating disease, as well as the
need to avoid inappropriate and potentially harmful treatment. IPF is often difficult to distinguish from other ILDs, even
with the most advanced imaging technologies. Further, diagnostic surgery is risky, expensive and may not be viable for some
patients. The Envisia classifier is the first product of its kind to market. We announced a final Medicare coverage policy for
the Envisia classifier in March 2019, which was followed by the online publication of positive clinical validation and clinical
utility data in The Lancet Respiratory Medicine in May 2019. Following these milestones, we initiated nationwide expansion
for the test, beyond the limited Early Access Program begun in 2018.

• Prosigna Breast Cancer Prognostic Gene Signature Assay. The Prosigna test uses advanced genomic technology to inform
next steps for patients with early-stage breast cancer, based on the genomic make-up of their disease. The test leverages a
collection of 50 genes known as the PAM50 gene signature, and can provide a breast cancer patient and physician with
prognostic score indicating the probability of cancer recurrence during the next ten years. Outside of the United States, it is
also utilized to provide cancer subtype classification information.

Physicians can use Prosigna to help guide therapeutic decisions so that patients receive therapeutic interventions, such as
chemotherapy, only if clinically warranted. The in vitro diagnostic test is indicated in female breast cancer patients who have
undergone surgery in conjunction with locoregional treatment consistent with standard of care, either as:

1. Aprognostic indicator for distant recurrence‐free survival at ten years in post‐menopausal women with Hormone Receptor‐
Positive (HR+), lymph node‐negative, Stage I or II breast cancer to be treated with adjuvant endocrine therapy alone,
when used in conjunction with other clinicopathological factors; or

2. Aprognostic indicator for distant recurrence‐free survival at ten years in post‐menopausal women with Hormone Receptor‐
Positive (HR+), lymph node‐positive (1‐3 positive nodes), Stage II breast cancer to be treated with adjuvant endocrine
therapy alone, when used in conjunction with other clinicopathological factors. The device is not intended for patients
with 4 or more positive nodes.

The Prosigna test is cleared by the FDA for marketing in the United States for use on the nCounter Dx Analysis System and
is available for use when ordered by a physician. The test is performed on formalin-fixed and paraffin-embedded, or FFPE,
tissue. The Prosigna test has been CE-marked, and is available for use by healthcare professionals in the European Union and
other countries that recognize the CE mark, as well as in Canada, Israel, Australia, New Zealand and Hong Kong. The test is
covered by Medicare and leading private payers in the United States and is widely covered by government and private payers
in the countries where it is available.

Our Pipeline

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Our product pipeline reflects our strategy of answering clinical questions in our indications across the clinical care continuum.
We develop new products using our RNA whole-transcriptome sequencing and machine learning platform and also strategically
acquire complementary products through collaborations and acquisitions. In December 2019, we acquired the exclusive global
rights to the nCounter® diagnostics platform, positioning us to make our genomic tests available to physicians and patients
worldwide through a distributed platform in which customers perform the tests in their local laboratories. This transaction also
expands our existing genomic test offerings into new oncology indications of breast cancer and lymphoma. We believe the global
market opportunity for our current and future pipeline products is over $40 billion annually.

•

•

•

Nasal Swab Test for Early Lung Cancer Detection - In October 2019, we announced preliminary clinical data showing that
our noninvasive nasal swab test - the first of its kind - may enable early lung cancer detection and diagnosis. The preliminary
findings specifically show that our novel genomic test has the potential to accurately classify lung cancer risk in patients with
lung nodules so that these patients may obtain the prompt diagnosis and potential treatment they need or may be monitored
noninvasively. The in-development test uses “field of injury” technology to determine the likelihood that a lung nodule is
cancerous by measuring gene expression patterns in cells collected from the nose. We plan to introduce the nasal swab test
commercially in the United States in early 2021 and internationally on the nCounter platform in 2022.

LymphMark Lymphoma Subtyping Test - The LymphMark test is in development for use on the nCounter platform. The
test uses the gene expression profile of cells found in Diffuse Large B-cell Lymphoma, or DLBCL, FFPE tissue for the
classification of Cell-of-Origin subtype of DLBCL intoActivated B-Cell-like or Germinal Center B-Cell-like or an unclassified
result. DLBCL is a heterogeneous group of cancers that represents the most common and one of the most aggressive forms
of Non-Hodgkin Lymphoma. According to the National Cancer Institute, there were approximately 70,000 new cases of Non-
Hodgkin Lymphoma in the United States in 2015.

Product Extensions - We are expanding our portfolio of tests across our indications - lung cancer, IPF, breast cancer and
lymphoma - to inform treatment decisions at the time of diagnosis, similar to what we have done with the Afirma Xpression
Atlas in thyroid cancer. Because our diagnostic and prognostic tests are positioned early in the clinical care continuum, we
have a unique opportunity to inform downstream decisions without the patient having to undergo further procedures to obtain
additional tissue samples.

Platform for Global Expansion

In December 2019, we acquired from NanoString an exclusive worldwide license to the nCounter FLEX Analysis System
for in vitro diagnostic use and for the development and commercialization of in vitro diagnostic tests. We expect this instrument
platform to enable a broad range of testing through its ability to simultaneous conduct multiplex testing of up to 800 RNA, DNA

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and protein targets. The nCounter system is simple to use and requires less than two hours of hands-on time, which is an up to 80
percent reduction compared to sequencing technology, making advanced genomic testing more accessible to patients through
laboratories that previously may not have had the resources or expertise to perform such complex testing.

As of December 31, 2019, several hundred nCounter instruments have been installed in more than 20 countries where they
are used for research as well as diagnostic testing in clinical laboratories and medical centers. The Prosigna breast cancer prognostic
gene signature assay is already offered on the system internationally and in the United States. We plan to begin offering the Envisia
classifier, for use in IPF diagnosis, to international customers in 2021 as a kit-based test that runs on the nCounter system. We
expect our in-development nasal swab classifier, for use in lung cancer diagnosis, to follow on the nCounter system in 2022, after
the test becomes available in our CLIA laboratory in the United States in early 2021. Over time, we plan to offer additional genomic
tests on the nCounter platform, including tests developed by potential diagnostics or biopharmaceutical partners seeking access
to global markets. For testing in the United States, we plan to incorporate the nCounter FLEX Analysis System into our CLIA lab,
as appropriate, to realize increased efficiency and margin expansion.

Biopharmaceutical Collaborations

We believe the powerful clinical and scientific platform we use in the discovery and development of new products also
provides multiple opportunities to monetize our assets through collaborations with biopharmaceutical companies. In developing
our products, we have built or gained access to unique biorepositories that include extensive clinical cohorts and whole genome
RNA sequencing data, which we believe are important to the development of new targeted therapies, determining clinical trial
eligibility and guiding treatment selection. Further, we believe our expanded global footprint and move into new clinical areas in
oncology, enabled by the nCounter FLEX Analysis System acquired from NanoString, will prove highly attractive to
biopharmaceutical companies, which need access to patients worldwide for their targeted therapies.

As of December 31, 2019, we had established biopharmaceutical collaborations with Loxo Oncology, Inc., or Loxo, a wholly-
owned subsidiary of Eli Lilly and Company, and Johnson & Johnson. In January 2020, we announced a new collaboration with
Acerta Pharma, the hematology research and development arm of AstraZeneca plc.

Through the research collaboration with Loxo Oncology, the biopharmaceutical company gained access to data derived from
our Afirma Xpression Atlas platform for use in its development of highly selective medicines for patients with genetically defined
cancers, including thyroid cancer.

We also collaborate with the Lung Cancer Initiative at Johnson & Johnson to advance the development and commercialization
of novel diagnostic tests to detect lung cancer at its earliest stages, when the disease is most treatable. The collaboration with
Johnson & Johnson, announced in January 2019, was formed to accelerate two key lung cancer programs for us: the
commercialization of our Percepta GSC on our RNA whole-transcriptome sequencing platform, which was achieved in June 2019,
and the development of the first noninvasive nasal swab test for early lung cancer detection. Under terms of the agreement, we
and Johnson & Johnson have combined clinical study cohorts involving more than 5,000 patients with multiple years of clinical
outcome data.

Through our collaboration with Acerta Pharma, we will provide genomic information that will support the biopharmaceutical
company’s development of oncology therapeutics in lymphoma. The Acerta Pharma collaboration followed the announcement of
our expansion into new oncology indications and global markets through our strategic transaction with NanoString.

Market Opportunity

The majority of our current business is focused on developing and commercializing genomic classifiers that help resolve
diagnostic uncertainty. We believe this is a critical healthcare issue that leads to hundreds of thousands of unnecessary surgeries,
delayed or potentially harmful treatments and billions of wasted healthcare dollars each year. We also offer genomic tests designed
to answer important questions at other points along the care continuum - often from the same patient samples used in diagnosis -
to further help improve patient outcomes and the use of healthcare resources. We believe the total addressable market for our
current tests - in thyroid cancer, lung cancer, IPF and breast cancer - is over $3.4 billion in the United States and Europe. We
believe the global market opportunity for our current and pipeline products is over $40 billion annually.

8

Thyroid Market Opportunity for Our Afirma Solution

Each year in the United States, we estimate that more than 525,000 FNA biopsies are performed to assess patients with
potentially cancerous thyroid nodules. Cytopathology is performed on each biopsy and we estimate that up to 30 percent of the
results are indeterminate (not clearly benign or malignant). Physicians have traditionally recommended thyroid surgery to obtain
a more definitive diagnosis. Following surgery, however, 70% to 80% of patients' nodules are diagnosed as benign, meaning the
surgery was unnecessary. Such surgery is invasive, costly and often leads to the need for lifelong daily thyroid hormone replacement
drugs. The Afirma classifier is included in most leading medical guidelines.

We believe the addressable market opportunity for our Afirma solution is $720 million in the United States and approximately

$100 million in the European Union. We currently do not have meaningful operations or sales outside the United States.

In January 2012, we obtained Medicare coverage for our Afirma classifier. The test is covered by every major health plan in
the United States, which collectively insure more than 275 million people. We are contracted as an in-network service provider
to health plans representing over 225 million people in the United States. We estimate that approximately 20% of patients evaluated
for thyroid cancer in the United States are covered by Medicare and the remaining 80% are covered by commercial plans or
Medicaid or they are self-insured.

Lung Cancer Market Opportunity for Our Percepta Classifier

Lung cancer is often difficult to diagnose without invasive, risky and costly surgeries. Nearly 230,000 people are diagnosed
with lung cancer each year in the United States and more than 140,000 people die annually from the disease. We estimate that
approximately 1.8 million to 2.0 million lung nodules are identified in patients in the United States each year and that doctors
perform approximately 545,000 bronchoscopies on these patients in order to obtain a diagnosis. A bronchoscopy is a non-surgical
procedure that is often used to evaluate patients with potentially cancerous lung nodules, but produces inconclusive results in up
to 70% of cases. We estimate that the number of bronchoscopies performed would potentially increase - in lieu of more invasive
procedures - if physicians had more confidence in the bronchoscopy procedure’s ability to provide clear results. Currently, we
estimate that approximately 230,000 patients undergoing bronchoscopy have inconclusive results and could potentially benefit
from our test.

We believe the addressable market opportunity for our Percepta product is approximately $490 million in the United States
and over $200 million in Europe. We anticipate the market will expand significantly over the coming years as lung cancer screening
programs are implemented in the United States and physicians embrace bronchoscopy as a standard, less-invasive diagnostic
modality for evaluating lung nodules and lesions.

In May 2017, we obtained Medicare coverage for Percepta, making it the first genomic test to be covered for use in lung
cancer screening and diagnosis. The test is available to nearly 60 million Medicare enrollees. We estimate that half of the patients
evaluated for lung cancer in the United States are covered by Medicare.

IPF Market Opportunity for Our Envisia Classifier

Each year in the United States and Europe, up to 220,000 patients are suspected of having an ILD, including IPF, which is
among the most common and deadly of these lung-scarring diseases. IPF is notoriously difficult to diagnose, often leading to
treatment delays, repeated misdiagnoses, patient distress and added healthcare expense. Physicians routinely use high-resolution
computed tomography imaging to identify UIP, the pattern whose presence is essential to IPF diagnosis. This approach, however,
frequently provides inconclusive results, leading many patients to require surgery to secure a more definitive diagnosis using
surgical histopathology. These surgeries are risky and expensive, and many patients are too frail to undergo the procedure. Of the
approximate 250,000 patients evaluated for ILD annually, we estimate that approximately 87%, or 191,000 patients receive an
uncertain diagnosis and are candidates for our Envisia test.

We believe the addressable market opportunity for our Envisia product is approximately $435 million in the United States

and up to $300 million in Europe.

In March 2019, we obtained final Medicare coverage for the Envisia classifier through the MolDX program, administered
by Palmetto GBA. The Envisia classifier is the first genomic test to be covered by Medicare for use in IPF diagnosis, with the test
available to the government health program’s nearly 60 million Medicare enrollees. We estimate that half of the patients evaluated
for ILDs/IPF in the United States are covered by Medicare.

Breast Cancer Market Opportunity for Our Prosigna Test

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Breast cancer is the most common cancer and the leading cause of cancer-related death in women worldwide. It impacts 2.1
million women and causes 627,000 deaths each year. Following diagnosis, physicians have traditionally used clinical factors -
tumor size, grade and nodal status - to help determine the risk of cancer recurrence and thus to help inform whether adjuvant
chemotherapy should be added to endocrine treatment. We believe that historically this subjective approach led to women
unnecessarily being exposed to toxic chemotherapy or to being undertreated.

The Prosigna assay measures RNA expression levels of 50 genes that provide a breast cancer patient and physician with a
prognostic score indicating the probability of cancer recurrence over ten years, as well as information on the patient’s breast cancer
genetic subtypes [Luminal A and B, Basal and HER2-Enriched (in ex-United States markets and CLIA)], which can further inform
treatment.

We estimate that the global early stage breast cancer recurrence market is significant, with over 500,000 patients potentially
eligible for Prosigna annually. This is comprised of approximately 115,000 patients in the United States and 400,000 in the rest
of the world. The Prosigna test is clinically validated in studies published in Annals of Oncology and the Journal of Clinical
Oncology. The test is recommended in guidelines from the National Comprehensive Cancer Network and the American Society
of Clinical Oncology in the United States. Medicare coverage for Prosigna through the MolDX program has been in effect since
October 2015. Outside of the United States, the test is included in leading medical guidelines, including from the National Institute
for Health and Care Excellence in the United Kingdom, which in 2019 recommended use of the test. We estimate that the addressable
market for Prosigna is approximately $700 million in the United States and $500 million in the European Union.

Scientific Background

In the past, clinicians made diagnoses from biopsy samples by looking at them under a microscope. Technology has advanced
far beyond this, and scientists now have the ability to decipher genomic patterns that reside in the DNA and RNA of such biopsies.
We search for patterns that tell us whether or not the biopsy contains the disease in question. We do this by using a whole-genome
approach. This means we look at all of the human genes, including their expression patterns and their variants and mutations,
rather than just looking at a few selected genes that we think may be important. This comprehensive measurement of the human
genome allows us to detect signals from genes we may not have previously suspected to be involved in disease.

We use machine learning-based algorithms to match genomic patterns with clinical truth, or the true diagnosis. For example,
when we train an algorithm on RNA sequencing data, we teach it to associate a set of expression patterns with disease and a
different set of patterns with lack of disease. When algorithms are trained on enough examples with clinical truth, they learn to
find that pattern in samples they have never encountered, thus allowing the algorithm to predict disease in a clinical setting.

Our core products are built around algorithms that help either rule in or rule out disease. Due to the complex, sometimes
rare, subtypes of various diseases like cancer, we develop and train our machine learning algorithms using a diverse set of patient
samples so that they are equipped to recognize patterns across the whole spectrum of conditions that may be encountered in the
clinic.

Our process uses commercially available reagents and instruments with our own proprietary process and protocols, which
results in RNA extraction from the range of small, minimally invasive biopsies used in our clinical development studies and our
commercial laboratory tests.

Our recently-acquired Prosigna breast cancer prognostic test similarly utilizes machine learning-based algorithms to provide
prognostic information for certain early-stage breast cancer patients. The RNA-based test uses a “PAM50” signature, comprised
of 50 genes, to compare the gene expression profile of a patient’s tumor - from a surgically removed sample - with each of four
intrinsic tumor subtypes to determine the degree of similarity. The results, in combination with a proliferation score and tumor
size, produce an individualized Prosigna risk-of-recurrence score. The Prosigna test was adapted to be performed using the nCounter
Analysis System so that it can be performed in local laboratories.

In addition to our primary tests in each of our clinical indications, our RNA sequencing platform also enables us to identify
gene alterations such as variants and fusions, copy number and other information - from samples utilized in initial testing - that
may inform next steps in patient care. We currently offer this capability in our thyroid cancer offerings as the Afirma Xpression
Atlas, which is used to help inform surgical strategy and treatment options for patients whose thyroid nodules are confirmed or
suspicious for cancer. We believe this capability may be especially useful in oncology and other diseases that are increasingly
treated using therapies that target specific gene alterations.

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Technology

Genomic Testing

Our technology approach for our genomic tests is comprised of a number of key attributes:

• Core Expertise in Broad-based Genomic Analysis. Our team of bioinformatics and computational scientists possess extensive
knowledge of both existing computational methods as well as the capacity to develop proprietary methods as needed for
algorithm design. We demonstrated our ability to utilize large amounts of genomic data with machine learning algorithms
in the development of the Afirma GEC on microarrays and substantially extended this capability in the development of the
Afirma GSC by accessing genomic features through deep RNA sequencing. Our expertise allows us to use a combination
of expression analysis as well as mutations and variants to build our sophisticated machine learning algorithms, all on the
same platform. Additionally, we believe our technological capabilities enable us to adapt our genomic tests to other platforms,
including the nCounter FLEX Analysis System for distribution to global markets.

• Platform-Agnostic Approach. We are not reliant on any one technology platform to measure genomic signals; in fact, we
may take advantage of a multitude of genomic methodologies to develop future tests. When we developed the Afirma GEC
in 2008, microarray technologies were a cost-effective discovery technology compared to other approaches that were nascent
at the time. More recently, the rapid cost reductions achieved in next generation sequencing platforms have allowed us to
pursue our whole genome approach to biomarker discovery using a range of genomic features obtained through both DNA
and RNA sequencing. From this vast array of sequence data, our algorithms select those genomic signals that inform on the
disease in question, in the relevant biopsy sample. We continue to evaluate potential opportunities to use new genomic
discoveries and technologies to further improve patient care.

• Proprietary Capabilities in Analyzing Small, Heterogeneous Cytology Samples. We have developed proprietary technology,
intellectual property and know-how for optimized methods for extraction and analysis of nanogram quantities of RNA from
small biopsy samples. Our focus is on redefining clinical truth, using patient samples obtained through less-invasive
techniques, thereby increasing access to our technology by a larger patient population. While others can extract RNA from
these small biopsies, we believe our process is optimized and scaled for high-throughput clinical testing and large-scale
clinical development studies, such as those involving high-density microarrays and next-generation sequencing.

• Precision and Reproducibility. We have in place standard operating procedures governing reagents, materials, instruments
and controls and extensive experience from numerous verification studies performed for our tests. We apply 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.

nCounter Platform

In December 2019, we acquired from NanoString an exclusive worldwide license to the nCounter FLEX Analysis System
for in vitro diagnostic use and for the development and commercialization of in vitro diagnostic tests. Currently, the Prosigna breast
cancer assay is the only commercially-available test on the platform.

The nCounter system can simultaneously analyze RNA, DNA or protein targets, as well as gene mutations, fusions and copy
number variations, in up to 800 genes. The system utilizes proprietary chemistry that allows the measurement of subtle changes
in the activity of multiple genes from minute amounts of a biological sample, with high sensitivity and precision. This chemistry
also obviates the need for amplification or other steps that can be cumbersome and time-consuming or may introduce the possibility
of measurement errors. As a result, the nCounter system enables easy-to-use genomic testing with simple workflow that requires
less than two hours of hands-on time - an up to 80 percent reduction compared to sequencing technology - making advanced
genomic testing more accessible to patients through laboratories that previously may not have had the resources or expertise to
perform such complex testing.

We believe the nCounter system’s sensitivity and multiplexing capabilities will provide a robust platform for our genomic
classifiers, enabling us to offer them in a kit format that can be performed locally in laboratories worldwide where the nCounter
system is installed. Additionally, we believe that we can perform our genomic classifiers on the nCounter system in our own CLIA
lab, enabling other, smaller-volume labs in the United States to offer our tests without the need to invest in an nCounter instrument,
while also enabling us to enhance our margins.

11

We expect to begin offering the Envisia classifier, for use in IPF diagnosis, to international customers in 2021 as a kit-based
test that runs on the nCounter system. We expect our in-development nasal swab classifier, for use in lung cancer diagnosis, to
follow on the nCounter system in 2022, after the test becomes available in our CLIA lab in the United States in early 2021. The
nCounter system can also run additional tests developed by us, as well as by potential diagnostics or biopharmaceutical partners
seeking access to global markets.

Studies Validating Test Performance and Clinical Utility

In 2010, the Centers for Disease Control and Prevention published the “ACCE” model as a paradigm for establishing evidence
to confirm the safety and effectiveness of molecular diagnostic tests. ACCE derives its name from the main criteria for evaluating
such tests, including analytic validity, clinical validity and clinical utility. This model has been adopted by most technology
assessment groups, professional societies and payers. We fully embrace this paradigm of evidence development and we strive to
provide the highest level of scientific evidence to support our test claims.

We believe that developing an extensive library of rigorous clinical evidence to support our tests is critical to driving inclusion
in clinical guidelines, securing reimbursement and gaining physician adoption. We make our published research, abstracts from
medical conferences and other product information available on our website at www.veracyte.com. Our website and the information
contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

Our Afirma classifiers are supported by more than 30 published scientific studies. These include a prospective, multicenter
clinical validation study published in The New England Journal of Medicine, which suggested that the test can significantly reduce
the number of unnecessary surgeries, compared to traditional diagnostic approaches. They also include a clinical validation study
with patients from this same cohort, which was published in JAMA Surgery and show that the next-generation Afirma GSC can
identify 30 percent more patients who may potentially avoid unnecessary surgery. The Afirma classifier is recommended in leading
practice guidelines and is covered for over 275 million lives in the United States, including through Medicare and all major
commercial insurance plans in the United States.

Our Percepta test is supported by six published scientific studies, including data published in The New England Journal of
Medicine, which demonstrate the test’s accuracy in identifying patients who are at low risk of cancer following inconclusive results
from bronchoscopy. These patients may then be monitored with CT scans in lieu of undergoing surgery - a frequent next step at
this juncture of the clinical pathway. A clinical utility study published in the CHEST journal showed that use of the test reduced
unnecessary surgeries in the target patient population, compared to physicians’ plans prior to Percepta testing.

Our Envisia classifier is supported by clinical data published in six peer-reviewed journals. These include a prospective
clinical validation study published in The Lancet Respiratory Medicine, which showed that the Envisia test achieved high specificity,
meaning it would be expected to identify more than two-thirds of patients with usual interstitial pneumonia, or UIP, the hallmark
of IPF, while minimizing the number of false positive results. In comparison, data show that high-resolution CT (HRCT) imaging,
which is typically used in IPF diagnosis, has a sensitivity of just 43 percent for UIP.

The Prosigna breast cancer prognostic test is supported by multiple clinical studies involving thousands of female patients
with early-stage breast cancer. These include a large clinical validation study published in Annals of Oncology. In this study of
1,478 patients, researchers found that the Prosigna risk of recurrence score added a “highly significant further increase in prognostic
information” compared to a clinical linear predictor alone. Data demonstrating the test’s clinical performance, clinical utility, cost-
effectiveness and analytical validation have been published in over a dozen peer-reviewed journals including the Journal of Clinical
Oncology, Journal of the National Cancer Institute and JAMA Oncology among others.

Commercial Operations

United States

Our commercial infrastructure, including our sales, marketing, managed care, and customer care functions, is critical to our
ongoing success. We have built a strong domestic sales, marketing and reimbursement capability that interacts directly with users
of our products, as well as payers and other stakeholders involved in the diagnostic workup of a patient.

Our sales team is structured to sell all of our tests; we do not maintain a separate sales force for each product. Currently, our
sales force is comprised of our product specialists, who are accountable for select geographic territories; pulmonary product
specialists, who maintain and grow our relationships with key regional institutions; account managers, who manage existing client
relationships; and medical science specialists, who focus on addressing medical and clinical education in the field.

12

We continued to expand our domestic field sales team in 2019 and we expect to continue to invest in sales and marketing to
support our commercial expansion efforts in the United States. Additionally, through the strategic transaction with NanoString,
we hired a small number of personnel to support Prosigna laboratory customers in the United States.

To date, substantially all of our revenue has been derived from customers we serve in the United States. Through December

31, 2019, we derived most of our revenue from our Afirma solution, including cytopathology services and the Afirma assays.

In addition to direct sales, industry trade shows or events provide us with an opportunity to share important product and
research updates and to interact with key opinion leaders who impact our business. We typically have a presence at a number of
select industry conferences, including the Annual Scientific and Clinical Congress of the American Association of Clinical
Endocrinologists, or AACE, and the Endocrine Society’s Annual Meeting, or ENDO; key pulmonology conferences such as the
American Thoracic Society’s International Conference, or ATS, and the American College of Chest Physician’s CHEST Annual
Meeting. With our expansion into breast cancer, we plan to also attend the annual San Antonio Breast Cancer Symposium.

Our other marketing efforts encompass a range of tools and channels, including product websites, digital marketing tactics
such as search engine optimization and online advertising, direct-to-customer communications and advertising in trade media
outlets read by our customers.

International

With our acquisition of the exclusive worldwide in vitro diagnostic rights for the nCounter platform, we hired several key
international members of NanoString’s global diagnostics sales, marketing, medical affairs and distribution teams, providing a
foundation for our international expansion efforts.

Prosigna is currently our only product generating revenue in global markets. Commercialization efforts for Prosigna involve
securing reimbursement, selling test kits to institutions and medical centers that already own or lease nCounter instruments, and
driving physician demand for the test.

Laboratory Operations

We perform all genomic testing in thyroid cancer, lung cancer and IPF in South San Francisco, California. For Afirma testing,
we perform slide preparation and staining for cytopathology on FNA samples in Austin, Texas. Our South San Francisco facility
is responsible for quality assurance oversight, licensing and regulatory compliance and maintenance for both of our laboratories
to ensure data integrity and consistent, validated processes.

We receive samples for testing directly from the following sources:

• FNAs for Afirma Genomic Testing Only. Institutions and other clients, such as laboratories, that perform their own
cytopathology may send us FNA samples from indeterminate results to perform Afirma genomic testing. We receive over
70% of our Afirma test volume from this source and it is the fastest-growing segment of our business.

• FNAs for Cytopathology and Reflexed Afirma Genomic Testing. We receive FNA samples from ordering physicians for
cytopathology assessment and if results are indeterminate, Afirma genomic testing is to be performed. We partner with
Thyroid Cytopathology Partners, or TCP, to perform the cytopathology review.

• Bronchoscopy Samples for Percepta Classifier. Institutions send us samples collected during the bronchoscopy procedure

and order genomic testing with the Percepta classifier when bronchoscopy results are inconclusive.

• Bronchoscopy Samples for Envisia Classifier. Institutions send us samples to help better differentiate IPFs from other ILDs

without the need for surgery. These samples are collected using transbronchial biopsy.

We rely on TCP to provide professional cytopathology diagnoses on thyroid FNA samples pursuant to a pathology services
agreement. Our agreement with TCP is effective until October 31, 2022 and 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-current term.

Our Prosigna breast cancer test is performed on the nCounter FLEX Analysis System in laboratories internationally and in
the United States. We believe that our state-of-the-art laboratory space in South San Francisco, California, has sufficient laboratory
capacity to accommodate volume growth for our existing and pipeline products, as well as for Prosigna testing on the nCounter
instrumentation system.

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Our quality assurance function oversees the quality of our laboratories as well as the quality systems used in research and
development, client services, billing operations and sales and marketing. We have an established quality management system
compliant with federal and state regulations and standards that we believe achieves excellence in operations across the entire
business. We continuously monitor and strive to improve our quality program and believe our implementation of these processes
has supported our achievement of product performance, customer satisfaction and retention and a philosophy of continuous
improvement.

Reimbursement Strategy

We employ a multi-pronged strategy designed to achieve broad coverage and reimbursement for our tests in the United States

and internationally:

•

Compile a Growing Library of Peer-reviewed Studies that Demonstrate the Test Is Effective. To date, several peer-
reviewed articles and review papers have been published and have helped support our efforts aimed at widespread
adoption and reimbursement of our genomic tests. In each disease area we pursue, we intend to conduct studies in order
to develop robust library of evidence.

• Meet the Evidence Standards Necessary to Be Consistent with Leading Clinical Guidelines. We believe inclusion in
leading clinical practice guidelines plays an important role in payers' coverage decisions. For example, the data published
on Afirma to date is consistent with the recommendations of the widely-recognized American Thyroid Association and
National Comprehensive Cancer Network clinical practice guidelines.

•

•

•

Execute an Internal Managed Care and Claims Adjudication Function as Part of Our Core Business Operations.
We believe that obtaining adequate and widespread reimbursement is a critical factor in our long-term success. We
employ a team of in-house claims processing and reimbursement specialists who work with payers, physician practices
and patients to obtain maximum reimbursement.

Collaborate with Network of Key Opinion Leaders. Key opinion leaders are able to impact clinical practice by publishing
research and determining whether new tests should be integrated into practice guidelines. We collaborate with key
opinion leaders early in the development process to ensure our clinical studies are designed and executed in a way that
clearly demonstrates the benefits of our tests to patients, physicians and payers. Ongoing studies to support real world
experience with our tests are also a key component of our efforts to collaborate with physician thought leaders.

Established Payer Relationships and In-network Contracts. We believe that positive engagement with payers leads
to coverage decisions and facilitates our efforts on coverage and contract decisions for subsequent tests.

Coverage, Coding and Reimbursement

United States

Revenue from our tests comes from several sources, including commercial third-party payers, such as insurance companies
and health maintenance organizations, government payers, such as Medicare and Medicaid, and patients. The Centers for Medicare
& Medicaid Services, or CMS, administers the Medicare and Medicaid programs, which provide health care to almost one in every
three Americans. For any particular geographic region, Medicare claims are processed at the local level by Medicare Administrative
Contractors, or MACs.

Medicare generally covers molecular diagnostic tests through the MolDX program, administered by the MAC, Palmetto
GBA. Medicare has covered our Afirma classifier testing since 2012 and Percepta classifier testing since 2017. We received
Medicare coverage for our Envisia classifier testing in 2019. The Prosigna test achieved Medicare coverage in 2015. We estimate
that Medicare covers approximately 20% of patients evaluated for thyroid cancer and approximately 50% of patients evaluated
for lung cancer, IPF and breast cancer, respectively.

Since 1984, Medicare has paid for clinical diagnostic laboratory tests, or CDLTs, on the Clinical Laboratory Fee Schedule,
or CLFS under section 1833(h) of the Social Security Act, or the SSA. Section 216(a) of the Protecting Access to Medicare Act
of 2014, or PAMA, added section 1834A to the SSA. The statute required extensive revisions to the Medicare CLFS coding, rate
setting processes, and laboratory payment reporting for CDLTs, and creates a new subcategory of CDLTs called Advanced
Diagnostic Laboratory Tests, or ADLTs, with separate reporting and payment requirements.

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In 2016, CMS issued the final rule to implement the requirements of PAMA, which significantly revised the Medicare
payment system for clinical diagnostic laboratory tests. The final rule was implemented on January 1, 2018 for the private payer
rate-based fee schedule required by PAMA. Under the final rule, for CDLTs furnished on or after January 1, 2018, the amount
Medicare pays is equal to the weighted median of private payer rates for the CDLT.

Prior to the implementation on January 1, 2018, the allowable Medicare rate for our Afirma GSC was $3,200. From January

1, 2018 through December 31, 2020, the allowable Medicare rate for our Afirma test under PAMA increased to $3,600.

In December 2019, through the Further Consolidated Appropriations Act of 2020, Congress delayed the next data reporting
period under PAMA from 2020 to 2021 for final payments made between January 1 and June 30, 2019, extending the applicability
of the payment rates based on 2017 reporting by one year through December 31, 2021. Afirma will continue to be paid at $3,600
through that date. The 2020 Medicare payment rate for Prosigna based on the volume-weighted median of private payer rates
under PAMA will be $2,510.21. In 2021, Prosigna’s rate will decrease by 15% to approximately $2,134. The volume-weighted
median of these private payer rates for final payments made from January through June 2019 (and now reported January through
March 2021) will now set the Medicare payment rate for the Afirma classifier and for Prosigna from January 1, 2022 through
December 31, 2024.

We submit claims to payers directly for the Afirma GSC, using a unique American Medical Association Current Procedural
Terminology code, or CPT code 81545. FNA samples are also received for cytopathology, for which we bill both the technical
and professional component using established CPT codes.

We bill payers directly for the Percepta and Envisia classifiers using an “unlisted” CPT code until we obtain specific codes
for the tests. Currently, labs in the United States that perform Prosigna testing on their own nCounter instruments bill payers
directly using the CPT code that is specific to the Prosigna test, 81520. We expect that, when we perform Prosigna testing in our
own CLIA certified lab that we will bill payers directly for Prosigna testing.

State Medicaid programs typically make their own decisions with respect to coverage for our tests, as do private payers. We
rely on a small number of third-party payers for a significant portion of our revenue, the loss of one or more of which would have
a negative effect on our business. For the years ended December 31, 2019, 2018, and 2017, respectively, revenue was represented
by the indicated percent for each payer:

• Medicare accounted for 29%, 26% and 27% of our revenue; and
•

UnitedHealthcare accounted for 12%, 14% and 12% of our revenue.

Outside the United States

Outside of the United States, we bill hospital and laboratory customers directly for test kits they order, which currently consist
of Prosigna test kits. Our customers subsequently bill third-party payers for reimbursement. Prosigna test marketing has initially
targeted private and cash-pay markets in Europe. We will continue to drive reimbursement efforts in Europe and other global
markets through the development of clinical and other evidence to support Prosigna’s inclusion in guidelines and coverage programs.

Competition

We believe the principal competitive factors in the markets we target with our advanced genomic tests include:

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•
•
•

the ability of the test to answer the appropriate clinical question at the right point in the clinical pathway;
the 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
local testing near the patient 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 these factors with our first-to-market Percepta and Envisia classifiers. Another competitive factor that we
believe will become increasingly important for advanced genomic tests offered within and outside of the United States is that they
be available as distributed kits on an instrument platform with broad functionality to justify the capital expense. We believe our
plans to adapt our genomic tests to the nCounter platform, which already can run the Prosigna test, will further enhance our tests’
attractiveness to hospitals and laboratories globally.

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Our principal competition for the Afirma solution comes from traditional methods used by physicians to diagnose thyroid
cancer. Physicians in the United States have historically recommended that patients with indeterminate diagnoses from
cytopathology results be considered for surgery to remove all or part of the thyroid to rule out cancer. This practice has been the
standard of care in the United States, as well as in many international markets, for many years, and we continue to educate physicians
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 mutational markers such as BRAF and KRAS, along with numerous other mutations. These organizations
include Interpace Diagnostics Group, Inc., CBLPath, Inc./University of Pittsburgh Medical Center, and others who are developing
new products or technologies that may compete with our tests. In the future, we may also face competition from companies
developing new products or technologies.

With the Percepta and Envisia tests, we believe our primary competition will similarly come from traditional methods used
by physicians to diagnose the related diseases. For the Percepta test, we expect competition from companies focused on lung
cancer such as Oncocyte Corporation and Biodesix, Inc. We also anticipate facing potential competition from companies offering
or developing approaches for assessing malignancy risk in patients with lung nodules using alternative samples such as blood,
urine or sputum, including Biodesix, Inc. and Guardant Health, Inc. However, such "liquid biopsies" are predominantly used later
in the diagnostic paradigm; for example, to inform treatment decisions for cancer or to gauge risk of recurrence or response to
treatment.

In the breast cancer diagnostics market, the Prosigna test competes with Exact Sciences Corporation’s Oncotype Dx, a service
for gene expression analysis performed in a central laboratory in Redwood City, California. We also face competition from
companies such as Agendia, Inc. and bioTheranostics, Inc., which also offer centralized laboratories that profile gene or protein
expression in breast cancer. Outside the United States, we also face regional competition from Myriad Genetics, Inc., and its
product EndoPredict, a distributed test for breast cancer recurrence.

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

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

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, which could be viewed by physicians and payers as functionally equivalent to our solution, or offer solutions at
prices designed to promote market penetration, which could force us to lower the list price of our solutions and affect our ability
to achieve profitability. If we are unable to change clinical practice in a meaningful way or compete successfully against current
and future competitors, we may be unable to increase market acceptance and sales of our products, which could prevent us from
increasing our revenue or achieving profitability and could cause the market price of our common stock to decline. As we add
new tests and services, we will face many of these same competitive risks for these new tests.

Regulation

Clinical 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. We are subject to CLIA, a federal law that regulates clinical laboratories that test specimens derived from
humans for the purpose of providing information for the diagnosis, prevention or treatment of disease. Under CLIA, which is
administered by CMS, we are required to hold a certificate applicable to the type of laboratory examinations we perform and to
comply with standards covering personnel qualifications, facilities administration, quality systems, inspections, and proficiency
testing. We must maintain CLIA compliance and certification to sell our tests and be eligible to bill for diagnostic services provided
to Medicare beneficiaries.

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Moreover, if one of our clinical reference laboratories is out of compliance with CLIA requirements, we may be subject to
sanctions such as suspension, limitation or revocation of our CLIA certificate, as well as directed plan of correction, state on-site
monitoring, civil money penalties, civil injunctive suit or criminal penalties. If we were to be found out of compliance with CLIA
requirements and subjected to sanctions, our business could be harmed.

We have historically held CLIA certifications to perform testing at our South San Francisco and Austin, Texas laboratory
locations. To renew our CLIA certificates, we are subject to survey and inspection every two years to assess compliance with
program standards. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratories. If we in the
future fail to maintain CLIA certificates in our South San Francisco or Austin, Texas laboratory locations we would be unable to
bill for services provided by state and federal healthcare programs, as well as many private third-party payers, which may have
an adverse effect on our business, financial condition and results of operations.

State Laboratory Licensing

California Laboratory Licensing

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

If our clinical reference laboratory is out of compliance with California standards, the California Department of Public Health,
or CDPH, may suspend, restrict or revoke our license to operate our clinical reference laboratory, assess substantial civil money
penalties, or impose specific corrective action plans. Any such actions could materially affect our business. We maintain a current
license in good standing with CDPH. However, we cannot provide assurance that CDPH will at 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 New York State. The license establishes standards for:

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•

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 in New York. If a laboratory is out of compliance with New York statutory or regulatory standards,
the New York State Department of Health, or NYSDOH, may suspend, limit, revoke or annul the laboratory's New York license,
censure the holder of the license or assess civil money penalties. Statutory or regulatory noncompliance may result in a laboratory's
operator being found guilty of a misdemeanor under New York law. NYSDOH also must approve the laboratory developed tests,
or LDTs, before the test is offered in New York; approval has been received for the Afirma GEC and the Percepta classifier. Should
we be found out of compliance with New York laboratory standards of practice, we could be subject to such sanctions, which
could harm our business. We maintain a current license in good standing with NYSDOH for our South San Francisco and Austin
laboratories. We cannot provide assurance that the NYSDOH 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 require licensing of out-of-state laboratories under certain circumstances.
Pennsylvania, Maryland and Rhode Island require licenses to test specimens from patients in those states and Florida requires a
license to receive specimens from a clinical laboratory in that state. We have obtained licenses from states where we believe we
are required to be licensed, and believe we are in compliance with 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 if we are contacted by any other state advising us of such
requirements, we intend to comply with such requirements.

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United States Regulation of Laboratory Testing

Food and Drug Administration: Diagnostic Kits

Diagnostic kits, including collection systems that are sold and distributed in the United States 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. In addition, manufacturers of medical devices must comply with various regulatory
requirements under the Federal Food, Drug, and Cosmetic Act, or FDC Act, and implementing regulations promulgated under that
Act. Entities that fail to comply with FDA requirements may be subject to issuance of inspectional observations on Form FDA-483,
untitled or warning letters, recalls, import detentions, seizures, or injunctions, including orders to cease manufacturing and can
be liable for civil money penalties or criminal prosecution.

The FDC Act sets forth for the classifications of medical devices into one of three categories based on the risks associated
with the device and prescribes the levels of controls appropriate for each of the three classes to help ensure reasonable assurance
of safety and effectiveness. Class I devices are considered to be low risk and are exempt from FDA premarket notification
requirements. Class I devices are subject to general regulatory controls. When general controls are considered insufficient to
provide reasonable assurance of safety and effectiveness, but there is sufficient information to establish special controls to provide
such assurance, FDA will classify the device as a Class II device. For most Class II devices, the FDC Act requires the submission
to FDA of a premarket notification, referred to as a “510(k),” which must provide data and information showing that the device
is substantially equivalent to a legally marketed device, referred to as a predictive device, with respect to the indications for use
and the product’s technological characteristics. If the data and information are sufficient to show that the device is as safe and
effective as the predicate device, FDA issues a Substantially Equivalent letter clearing the device for marketing.

If there is insufficient information to support classifying a device into Class I or Class II and the device is life-sustaining or
life-supporting or is substantially important in preventing illness or injury or presents a potential unreasonable risk of illness or
injury, FDA places the device into Class III. Class III devices are considered the highest risk devices and generally require
significant data and information, including testing data and data from nonclinical and clinical studies, to provide reasonable
assurance of the device's safety and effectiveness. Class III devices require the submission and FDA approval of a premarket
application, or PMA, before they can be marketed.

Certain devices are classified as Class III devices automatically, by operation of law, when the device does not have a predicate
device or is found not to be substantially equivalent to a predicate device. If there is sufficient evidence to show that the device is
a lower risk device, a manufacturer may ask FDA to reclassify the device into Class II or Class I by submitting a De Novo
classification request. When FDA reclassifies a device through the De Novo process, other manufacturers of the same device type
do not necessarily have to submit a De Novo request or a PMA in order to legally market the device. Instead, manufacturers can
submit a 510(k), unless the device has been classified as 510(k) exempt, to legally market their device, because the device that
was the subject of the original De Novo request can serve as a predicate device for a substantial equivalence determination. If FDA
does not issue an order granting the De Novo request for reclassification, the device will remain a Class III device and be subject
to PMA requirements to obtain marketing authorization.

Establishments that manufacture or distribute FDA-related medical devices, including manufacturers, repackagers and

relabelers, specification developers, and initial importers, are required to register and list their device products with the FDA.

Devices that may be legally marketed are subject to numerous regulatory requirements. These include: good manufacturing
practice for medical devices as set out in the Quality System Regulation, or QSR, labeling regulations, restrictions on promotion
and advertising, the Medical Device Reporting, or MDR (which requires manufacturers to report to the FDA), and the Reports of
Corrections and Removals regulation (which requires manufacturers to report certain recalls and field actions to the FDA). Certain
corrections and market removals may also be subject to FDA’s recall regulation and procedures.

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 destroyed or used effectively for diagnostic examination. A specimen
transport and storage container that is not labeled or otherwise represented as sterile is classified as a Class I exempt device, which
means that the device is exempt from the 510(k) premarket notification requirement and the QSR, except for recordkeeping and
complaint handling requirements. These 510(k) exempt devices are still subject to MDR requirements, the reporting of corrections
and removals, and establishment registration and product listing.

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In our FDA registration, we have registration, we have listed the containers we provide for collection and transport of Afirma
GEC or GSC and Percepta samples from a physician to our clinical reference laboratory as Class I devices in accordance with the
classification of regulation for the specimen transport and storage container . We also plan to list our sample collection containers
for Envisia samples with the FDA as Class I devices. If the FDA were to determine that our sample collection containers are not
Class I devices, we would be required to file 510(k) applications and obtain FDA clearance to manufacture and market 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 can institute a wide variety of enforcement actions, ranging from an Untitled Letter or Warning Letter to
more severe sanctions such as:

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•

fines, injunctions, and civil money 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 our proprietary genomic tests are regulated under CLIA, as administered by CMS, as well as
by applicable state laws. Clinical laboratory tests that are developed and validated by a laboratory are referred to as laboratory
developed tests, or LDTs, by the FDA. Currently, FDA believes these tests meet the definition of a device under the FDC Act;
however, the FDAis currently exercising enforcement discretion for LDTs, meaning that FDAis not enforcing the device regulations
that FDA has stated apply to clinical laboratories performing a LDT , although FDA may continue to enforce device regulations
with respect to reagents, instruments, software or components provided by third parties and used to perform LDTs. We believe
that the Afirma, Percepta and Envisia classifiers are LDTs for which FDA is currently exercising its enforcement discretion. In
October 2014, the FDA published a draft guidance document proposing a framework for the regulation of LDTs. In November
2016, the FDA announced that it would not finalize guidance and would instead work with the new Administration, Congress and
stakeholders on an updated framework. In January 2017, the FDA issued a discussion paper on LDTs in which it synthesized
stakeholder feedback and outlined a substantially revised "possible approach" to the oversight of LDTs, which did not represent
a formal position of the FDA, and is not enforceable. In a December 2018 statement, FDA said that there is a need for “a unified
approach to the regulation of in vitro clinical tests to protect patient safety, support innovation, and keep pace with the rapidly
evolving technology that’s helping us find new treatments for disease,” and listed key principles of an approach it would support.
However, FDA’s enforcement discretion policy is expected to remain in place unless and until FDA announces and implements a
different approach to the regulation of LDTs.

Some of the materials we use for our tests and that we may use for future tests are in vitro diagnostic products intended and
labeled for research use only, or RUO, or investigational use only, or IUO. An RUO product cannot be used for any human clinical
purpose and must be labeled "For Research Use Only. Not for use in diagnostic procedures." RUOs are a separate regulatory
category and include in vitro diagnostic devices that are in the laboratory research phase of development. They are therefore not
subject to most FDA regulatory requirements so long as they are properly labeled and used in accordance with such labeling.
RUOs cannot be marketed with any claims that the device is safe, effective, or has diagnostic utility, or is intended for human
clinical diagnostic or prognostic use. In November 2013, the FDA issued final guidance titled “Distribution of In-Vitro Diagnostic
Products Labeled for Research Use Only or Investigational Use Only” regarding the distribution, use, and labeling of in vitro
diagnostic products labeled RUO or IUO. The FDA has advised that if evidence demonstrates that a product is inappropriately
labeled for research or investigational use only, the device would be considered misbranded and adulterated within the meaning
of the FDC Act. In the guidance, FDA stated that the manufacturer’s objective intent for an RUO or IUO product’s intended use
will be determined by examining the totality of circumstances, including advertising, instructions for clinical interpretation,
presentations that describe clinical use, and specialized technical support, surrounding the distribution of the product in question.

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

We cannot provide any assurance that FDA premarket review or other requirements will not be imposed in the future for our
diagnostic services, whether through additional guidance or regulations issued by the FDA, new enforcement policies adopted by

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the FDA or new legislation enacted by Congress. Legislative proposals addressing oversight of LDTs were introduced in recent
years, most recently the Verifying Accurate Leading-edge IVCT Development (VALID) Act of 2018 in December 2018, and we
expect that new legislative proposals will be introduced from time to time. It is possible that legislation could be enacted into law
or regulations or guidance could be issued by the FDA which may result in new or increased regulatory requirements for us to
continue to offer our tests or to develop and introduce new tests.

If premarket review, clearance, or approval, is required, our business could be negatively affected until such review is
completed and clearance or approval to market is obtained, and the FDA could require that we stop selling our tests pending
premarket clearance or approval. If our tests are allowed 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 if FDA limits the use and corresponding labeling
claims, order levels may decline and reimbursement may be adversely affected. The regulatory process may involve, among other
things, successfully completing additional clinical studies and submitting to FDA a premarket notification to obtain clearance or
a PMA to obtain approval to market the device. If clearance or approval is required by the FDA, there can be no assurance that
our tests will be cleared or approved on a timely basis, if at all, nor can there be any assurance that approved labeling claims or
labeling claims subject to cleared indications for use will be consistent with our current claims or adequate to support continued
adoption of and reimbursement for our solutions. Ongoing compliance with FDA regulations would increase the cost of conducting
our business, and subject us to heightened requirements of the FDA and penalties for failure to comply with these requirements.
We may also decide voluntarily to pursue FDA premarket review of our tests to obtain marketing clearance or approval if we
determine that doing so would be appropriate.

Privacy and Fraud and Abuse Compliance

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 issued regulations to protect the privacy and security of protected health information used or disclosed
by health care providers, such as us. HIPAA also regulates standardization of data content, codes and formats used in health care
transactions and standardization of identifiers for health plans and providers. In 2009, Congress amended HIPAA through the
Health Information Technology for Economic and Clinical Health Act, or HITECH. The implementing regulations of HIPAA, as
amended by HITECH, were last modified in 2013 and resulted in significant changes to the privacy, security, breach notification,
and enforcement requirements with which we must comply. Among these changes, covered entities are now vicariously liable for
violations of HIPAA resulting from acts or omissions of their business associates where the business associate is an agent of the
covered entity and was acting within the scope of its agency, regardless of whether the covered entity and business associate entered
into a business associate agreement in compliance with HIPAA. Penalties for violations of HIPAA regulations include civil and
criminal penalties.

We have developed and implemented policies and procedures designed to comply with HIPAA’s privacy, security, and breach
notification requirements. We may not use or disclose protected health information in any form, including electronic, written, or
oral, in a manner that is not permitted under HIPAA, and we are required to implement security measures to ensure the confidentiality,
integrity, and availability of the electronic protected health information that we create, receive, maintain, or transmit. While we
have some flexibility in determining which security safeguards are reasonable and appropriate to implement for our operations,
it nonetheless requires significant effort and expense to ensure continuing compliance with the HIPAA security rule. We are also
required to comply with the administrative simplification standards under HIPAA when we conduct the electronic transactions
regulated by HIPAA, including by using standard code sets and formats and standardized identifiers for health plans and providers.
The requirements under HIPAA and its implementing regulations may change periodically and could have an effect on our business
operations if compliance becomes substantially costlier 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. In particular, we are subject to the California Consumer Privacy Act, or CCPA, which was
enacted in California in 2018 and components of which went into effect on January 1, 2020. The CCPA, among other things,
requires covered companies to provide disclosures to California consumers concerning the collection and sale of personal
information, and gives such consumers the right to opt-out of certain sales of personal information. Amendments to the CCPA
have been made since its enactment, and it remains unclear what, if any, further amendments will be made to this legislation or
how it will be interpreted.

Recent developments in Europe have created compliance uncertainty regarding the processing of personal data from Europe.
For example, the General Data Protection Regulation, or GDPR, which became effective in the European Union on May 25, 2018,
applies to our activities conducted from an establishment in the EU or related to products and services that we offer to European
Union users. The GDPR creates new compliance obligations applicable to our business, which could cause us to change our

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business practices, and increases financial penalties for noncompliance (including possible fines of up to 4% of global annual
turnover for the preceding financial year or €20 million (whichever is higher) for the most serious infringements).

New laws governing privacy may be adopted in the future from time to time. We have taken steps to comply with health
information privacy requirements to which we are 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 the jurisdictions in which we do business. Failure to
comply with privacy requirements could result in civil or criminal penalties, which could have a materially adverse effect on our
business.

Corporate Practice of Medicine

Numerous states, including California and Texas, have enacted laws prohibiting corporations such as us from practicing
medicine and employing or engaging physicians to practice medicine. These laws are designed to prevent interference in the
medical decision-making process by anyone who is not a licensed physician. This prohibition is generally referred to as the
prohibition against the corporate practice of medicine. Violation of this prohibition may result in civil or criminal fines, as well
as sanctions imposed against us or the professional through licensing proceedings. The pathologists who review and classify thyroid
FNA cytopathology results for Afirma are employed by TCP, a Texas professional association, pursuant to services agreement
between us and 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 the cytopathology services as a component of the Afirma solution.

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 the self-referral prohibitions of certain states in which we operate, including California's Physician Ownership and Referral
Act, or PORA. Together these restrictions generally prohibit us from billing a patient or any governmental or private payer for
any diagnostic services when the physician ordering the service, or any member of such physician's immediate family, has an
investment interest in or compensation arrangement 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 meeting certain contractual requirements. We have compensation arrangements with a number of physicians for
personal services, such as speaking engagements and consulting activities. We have structured these arrangements 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 be required 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:

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•

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 a violation. In addition, knowing violations of the Stark Law may also serve as the basis for liability
under the Federal False ClaimsAct which prohibits knowingly presenting, or causing to be presented, a false, fictitious, or fraudulent
claim for payment to the U.S. Government.

Further, a violation of PORA is a misdemeanor and could result in civil penalties and criminal fines. Finally, other states
have self-referral restrictions with which 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 similar laws 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, and we 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

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The federal 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 the Anti-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 the authority to impose
civil assessments and fines and to exclude health care providers and others engaged in prohibited activities from Medicare, Medicaid
and other federal health care programs. Actions which violate the Anti-kickback Law also incur liability under the Federal False
Claims Act, which prohibits knowingly presenting, or causing to be presented, a false, fictitious, 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 substantially similar to the Anti-kickback Law pursuant to which similar types of prohibitions are made applicable
to all other health plans and third- party payers. California's fee-splitting and Anti-kickback statute, Business and Professions Code
Section 650, and its Medi-Cal Anti-kickback statute, Welfare and Institutions Code Section 14107.2, have been interpreted by the
California Attorney General and California courts in substantially the same way as HHS and the courts have interpreted 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
is punishable 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 the arrangements are not designed as a mechanism to induce patient care referrals or induce the purchase
or prescribing of particular products or services. The law enforcement authorities, the courts and Congress have also demonstrated
a willingness to look behind the formalities of a transaction to determine the underlying purpose of payments between health care
providers and actual or potential referral sources. Generally, courts have taken a broad interpretation of the scope of the Anti-
kickback Law, holding that the statute may be violated if merely one purpose of a payment arrangement is to induce referrals or
purchases.

The federal Anti-kickback Law includes statutory exceptions and provides for a number of safe harbors. If an arrangement
meets the provisions of a safe 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 to qualify for protection. Many state anti-kickback statutes have analogous
exceptions or safe harbors to those of the federal Anti-kickback Law. These state anti-kickback statutes have generally been
interpreted consistently with the Anti-kickback Law.

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 providers and suppliers, including laboratories, to physicians or institutions. If the terms of the discount
safe harbor are met, the discounts will not be considered prohibited remuneration under the Anti-kickback Law. California does
not have a discount safe harbor. However, as noted above, Section 650 has generally been interpreted consistent with the Anti-
kickback Law.

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 physician on 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 such intervals, their precise length, and
the exact charge for such intervals. Our personal services arrangements with some physicians may not meet the specific requirement
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-case basis under the language of the statute, taking
into account all facts and circumstances.

While we believe that we are in compliance with the Anti-kickback Law, Section 650, and Section 14107.2, 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, Section 650, or Section 14107.2
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, provisions of the Social Security Act permit Medicare and Medicaid to exclude an entity that charges the
federal health care programs substantially in excess of its usual charges for its services. The terms "usual charge" and "substantially

22

in excess" are ambiguous and subject to varying interpretations, though the Department of Health and Human Services’ Office of
the Inspector General has provided some guidance on the topic.

Further, the federal False Claims Act prohibits a person from knowingly presenting or causing to be presented a false or
fraudulent claim to, making a false record or statement in order to secure payment from or retaining an overpayment by the federal
government. In addition to actions initiated by the government itself, the statute authorizes actions to be brought on behalf of 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 pending for 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 plaintiff succeeds in obtaining redress without the government's involvement, then the
plaintiff will receive a percentage of the recovery. Finally, the Social Security Act includes its own provisions that prohibit the
filing of false claims or submitting false statements in order to obtain payment. Violation of these provisions may result in up to
treble damages, substantial civil penalties, fines, imprisonment or combination of the above, and possible exclusion from Medicare
or Medicaid programs. California has an analogous state false claims act applicable to all 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 with all such laws
and regulations.

In general, in recent years U.S. Attorneys’ Offices have increased scrutiny of the healthcare industry, as have Congress, the
Department of Justice, the Department of Health and Human Services’ Office of the Inspector General and the Department of
Defense. These bodies have all issued subpoenas and other requests for information to conduct investigations of, and commenced
civil and criminal litigation against, healthcare companies based on financial arrangements with health care providers, regulatory
compliance, product promotional practices and documentation, and coding and billing practices. Whistleblowers have filed
numerous qui tam lawsuits against healthcare companies under the federal and state False Claims Acts in recent years, in part
because the whistleblower can receive a portion of the government’s recovery under such suits.

In addition, in October 2018, the Eliminating Kickbacks in Recovery Act of 2018, or EKRA, was enacted as part of the
SUPPORT for Patients and Communities Act (P.L 115-271). This law prohibits the solicitation, receipt, payment or offering of
any remuneration in return for referring a patient or patronage to a recovery home, clinical treatment facility, or laboratory for
services covered by both government and private payers. EKRAalso applies to the payment or offering of remuneration in exchange
for an individual using the services of a recovery home, clinical treatment facility, or laboratory. To date, neither the Department
of Justice nor the Department of Health and Human Services has issued guidance further interpreting or implementing EKRA.

Finally, under PAMA, laboratories are required to report to CMS the private payer payment rates and test volumes paid by
private payers based on final payments made during a specific “data collection period.” This data reporting requirement is triennial
for most clinical diagnostic laboratory tests (annual for ADLTs), with the first data reporting period occurring in 2017 for final
payments made in January through June 2016. The next data reporting period will be in 2021 for final payments made in January
through June 2019. When reporting data under PAMA, the President, CEO, or CFO of a reporting entity, or an individual who
has been delegated authority to sign for, and who reports directly to, such an officer, must sign the certification statement and be
responsible for assuring that the data provided are accurate, complete, and truthful, and meets all the required reporting parameters.
Failure to report or misrepresentation or omission in reporting can result in civil penalties of up to $10,000 per day for each violation
and other penalties. We believe we are in compliance with the PAMA reporting requirements, but there can be no assurance that
our reporting practices will not be scrutinized under the PAMA regulations.

International

Many countries in which we may offer any of our tests in the future have anti-kickback regulations prohibiting providers
from offering, paying, soliciting or receiving remuneration, directly or indirectly, in order to induce business that is reimbursable
under any national health care program. In situations involving physicians employed by state-funded institutions or national health
care agencies, violation of the local anti-kickback law may also constitute a violation of the United States Foreign 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, including any potential distributors we may rely on in certain markets, anything of value to a foreign
government official with corrupt intent to influence an award or continuation of business or to gain an unfair advantage, whether
or not such conduct violates local laws. In addition, 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 accounting controls. 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.

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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 of up 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. Other countries, including the United
Kingdom and other OECD Anti-Bribery Convention members, have similar anti-corruption regulations, such as the United
Kingdom Anti-bribery Act.

When marketing our tests outside of the United States, we may be subject to foreign regulatory requirements governing
human clinical testing, prohibitions on the 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 of tissue into the United States, and marketing approval.
These requirements vary by jurisdiction, differ from those in the United States and may in some cases require us to perform
additional pre-clinical or clinical testing. In many countries outside of the United States, coverage, pricing and reimbursement
approvals are also required.

Patents and Proprietary Technology

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 combination of patents, copyrights and trademarks, as well as contracts, such as confidentiality, invention
assignment and licensing agreements. We also rely upon trade secret laws to protect unpatented know-how and continuing
technological innovation. In addition, we have what we consider to be reasonable security measures in place to maintain
confidentiality. Our intellectual property strategy is intended to develop and maintain our competitive position.

We apply for and in-license patents covering our products and technologies and uses thereof, as we deem appropriate, however
we may fail to apply for patents on important products and technologies in a timely fashion or at all, or we may fail to apply for
patents in potentially relevant jurisdictions. Our issued patents expire between 2029 and 2035 and are related to methods used in
the Afirma thyroid diagnostic platform, lung diagnostics, breast cancer diagnostics, and the nCounter analysis platform.

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 listed above) 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 our technology. 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," "Percepta," "Know By Design," the Afirma
logo, and the current and former Veracyte logos, and we have a pending federal trademark application for "Envisia". We also hold
registered trademarks 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 information received by them during the course of the employment, consulting or business relationship be kept
confidential, except in specified circumstances. Our agreements with our research employees provide that all inventions, discoveries
and other types of intellectual property, whether or not patentable or copyrightable, conceived by 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 by
the confidentiality or assignment terms of these agreements. Despite measures taken to protect our intellectual property,
unauthorized parties might copy aspects of our technology or obtain and use information that we regard as proprietary.

Employees

At December 31, 2019, we had 354 employees, of which 60 work in laboratory operations, 33 in research and development
and clinical development, 175 in selling and marketing, and 86 in general and administrative, including 59 in billing and client
services, 10 in information technology and 9 in finance. None of our employees 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 environmental and safety laws and regulations. Some of these regulations provide for strict liability, holding a party
potentially liable without regard to fault or negligence. We could be held liable for damages and fines as a result of our, or others’,
business operations should contamination of the environment or individual exposure to hazardous substances occur. We cannot
predict how changes in laws or new regulations will affect our business, operations or the cost of compliance.

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Raw Materials and Suppliers

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

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.

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ITEM 1A. RISK FACTORS

Risks Related to Our Business

We have a history of losses, and we expect to incur net losses for the foreseeable future and may never achieve or sustain
profitability.

We have incurred net losses since our inception. For the year ended December 31, 2019, we had a net loss of $12.6 million
and as of December 31, 2019, we had an accumulated deficit of $246.7 million. We expect to incur additional losses in the future,
and we may never achieve revenue sufficient to offset our expenses. Over the next couple of years, we expect to continue to devote
substantially all of our resources to increase adoption of, and reimbursement for our Afirma, Percepta and Envisia classifiers and
Prosigna test, and the development of additional tests. We may never achieve or sustain profitability, and our failure to achieve
and sustain profitability in the future could cause the market price of our common stock to decline.

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

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

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

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

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

Revenue for tests performed on patients covered by Medicare and UnitedHealthcare was 26% and 11%, respectively, of
our revenue for the twelve months ended December 31, 2019, compared with 29% and 12%, respectively, for the twelve months
ended December 31, 2018. The percentage of our revenue derived from significant payers is expected to fluctuate from period to
period as our revenue fluctuates, as additional payers provide reimbursement for our tests or if one or more payers were to stop
reimbursing for our tests or change their reimbursed amounts. Effective January 2012, Palmetto GBA, the regional Medicare
Administrative Contractor, or MAC, that handled claims processing for Medicare services over our jurisdiction at that time, issued
coverage and payment determinations for our Afirma Classifiers now covered by Noridian Healthcare Solutions, the current MAC
for our jurisdiction, through the Molecular Diagnostics Services Program, or MolDX program, administered by Palmetto GBA,
under a Local Coverage Determination, or LCD.

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

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

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

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

On March 1, 2015, an American Medical Association Current Procedural Terminology code, or CPT code, 81545 for the
Afirma GEC was issued. On January 1, 2018, the Medicare Clinical Laboratory Fee Schedule payment rate for the Afirma classifier
increased from $3,220 to $3,600. This rate is based on the volume-weighted median of private payer rates based on final payments
made between January 1 and June 30, 2016, which we reported to the Centers for Medicare & Medicaid Services, or CMS, in
2017 as required under the Protecting Access to Medicare Act of 2014, or PAMA. In December 2019, through the Further
Consolidated Appropriations Act of 2020, Congress delayed the next data reporting period from 2020 to 2021 for final payments
made between January 1 and June 30, 2019, extending the applicability of the payment rates based on 2017 reporting by one year
through December 31, 2021. Afirma will continue to be paid at $3,600 through that date. The volume-weighted median of private
payer rates for final payments made from January through June 2019 (and now reported January through March 2021) will set the
Medicare payment rate for the Afirma classifier from January 1, 2022 through December 31, 2024. There can be no assurance
that the Afirma or Prosigna rates will not decrease during this or a subsequent reporting cycle under PAMA.

We submit claims to Medicare for Percepta and Envisia using unlisted codes under the MolDX program. Specific CPT
codes assigned to Percepta and Envisia may be required to go through the national payment determination process, and there can
be no assurance that the Medicare payment rates the tests receive through this process will not be lower than their current payment
rates. There can also be no assurance that the Medicare payment rates for the tests will not be reduced when they are set based on
the volume-weighted medians of private payer rates when we are required to report those rates under PAMA.

If there is a decrease in the Medicare payment rate for our tests, our revenue from Medicare will decrease and the payment
rates for some of our commercial payers may also decrease if they tie their allowable rates to the Medicare rates. These changes
could have an adverse effect on our business, financial condition and results of operations.

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

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

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

•

not experimental or investigational;

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•

•

•

•

pre-authorized and appropriate for the specific patient;

cost-effective;

supported by peer-reviewed publications; and

included in clinical practice guidelines.

Since each payer makes its own decision as to whether to establish a coverage policy or enter into a contract to reimburse

our tests, seeking these approvals is a time-consuming and costly process.

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

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

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

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

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

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

Some patients may decide not to use our tests because of price, all or part of which may be payable directly by the patient
if the patient’s insurer denies reimbursement in full or in part. There is a growing trend among insurers to shift more of the cost
of healthcare to patients in the form of higher co-payments or premiums, and this trend is accelerating which puts patients in the
position of having to pay more for our tests. We expect to continue to see pressure from payers to limit the utilization of tests,

28

generally, and we believe more payers are deploying costs containment tactics, such as pre-authorization and employing laboratory
benefit managers to reduce utilization rates. Implementation of provisions of the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Affordability Reconciliation Act, collectively the ACA, has also resulted in increases
in premiums and reductions in coverage for some patients. In addition, Congressional efforts to repeal the ACA could result in an
increase in uninsured patients. These events may result in patients delaying or forgoing medical checkups or treatment due to their
inability to pay for our tests, which could have an adverse effect on our revenue.

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

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

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

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

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

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

29

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

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

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

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

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

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

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

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

We recognize test revenue upon delivery of the patient report to the prescribing physician based on the amount we expect
to ultimately realize. We determine the amount we expect to ultimately realize based on payer reimbursement history, contracts,
and coverage. Upon ultimate collection, the amount received is compared to the estimates and the amount accrued is adjusted
accordingly. We cannot be certain as to when we will receive payment for our diagnostic tests, and we must appeal negative
payment decisions, which delays collections. Should 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 be meaningful. You should not rely on our past results as an indication
of our future performance. In addition, these fluctuations in revenue may make it difficult for us, for research analysts and for
investors to accurately forecast our revenue and operating results. If our revenue or operating results fall below expectations, the
price of our common stock would likely decline.

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

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

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

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

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

The ACA, enacted in March 2010, made changes that significantly affected the pharmaceutical and medical device
industries and clinical laboratories. Along with the now-repealed 2.3% excise tax on the sale of certain medical devices sold outside
of the retail setting, other significant measures contained in the ACA include, for example, coordination and promotion of research
on comparative clinical effectiveness of different
initiatives to revise Medicare payment
methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives to promote
quality indicators in payment methodologies. The ACA also includes significant new fraud and abuse measures, including required
disclosures of financial arrangements with physician customers, lower thresholds for violations and increasing potential penalties
for such violations.

technologies and procedures,

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

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

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

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

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

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

PAMA includes a substantial new payment system for clinical laboratory tests under the CLFS. Under PAMA, laboratories
that receive the majority of their Medicare revenues from payments made under the CLFS and the Physician Fee Schedule would
report on triennial bases (or annually for advanced diagnostic laboratory tests, or ADLTs), private payer rates and volumes for
their tests with specific CPT codes based on final payments made during a set data collection period (the first of which was January
1 through June 30, 2016). We believe that PAMA and its implementing regulations are generally favorable to us. We reported to
CMS the data required under PAMA before the March 31, 2017 deadline. The new payment rate for the Afirma genomic classifier
based on the volume-weighted median of private payer rates took effect January 1, 2018, increasing from $3,220 to $3,600 through
December 31, 2020. In December 2019, through the Further Consolidated Appropriations Act of 2020, Congress delayed the next
data reporting period from 2020 to 2021 for final payments made between January 1 and June 30, 2019, extending the applicability
of the current rate for Afirma through December 31, 2021. The volume-weighted median of the private payer rates between January
1 and June 30, 2019 will now set the Medicare payment rate for the Afirma classifier from January 1, 2022 through December 31,
2024. There can be no assurance that the payment rate for Afirma or Prosigna will not decrease in the future or that the payment
rates for Percepta or Envisia will not be adversely affected by the PAMA law and regulations.

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

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

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

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

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

Under previous Medicare billing rules, hospitals were required to bill for our tests when performed on Medicare
beneficiaries who were hospital outpatients at the time of tissue specimen collection when these tests were ordered less than 14
days following the date of the patient's discharge.

Effective January 1, 2018, CMS revised its billing rules to allow the performing laboratory to bill Medicare directly for
molecular pathology tests performed on specimens collected from hospital outpatients, even when those tests are ordered less than
14 days after the date of discharge, if certain conditions are met. We believe that our Afirma, Percepta, and Envisia classifiers,
along with Prosigna, should be covered by this policy. Accordingly, we bill Medicare for these tests when we perform them on
specimens collected from hospital outpatients and meet the conditions set forth in CMS's revised billing rules.

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

In the CY 2020 Hospital Outpatient Prospective Payment System Proposed Rule, CMS solicited comments on potential
revisions to these billing rules that could have impacted our ability to bill Medicare directly for our Afirma, Percepta, and Envisia
classifiers, as well as for Prosigna, when performed on specimens collected from hospital outpatients. Although these changes
were not finalized, if CMS makes similar changes in the future, it could negatively impact our business.

In addition, we must maintain CLIA compliance and certification to sell our tests and be eligible to bill for diagnostic

services provided to Medicare beneficiaries.

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

Clinical laboratory tests have long been subject to comprehensive regulations under CLIA, as well as by applicable state
laws. Most laboratory developed tests, or LDTs, are not currently subject to regulation under the FDA's enforcement discretion
policy, although reagents, instruments, software or components provided by third parties and used to perform LDTs may be subject
to regulation. While the FDA maintains its authority to regulate LDTs, it has chosen to exercise its enforcement discretion not to
enforce the premarket review and other applicable medical device requirements for LDTs. We believe that the Afirma, Percepta
and Envisia classifiers are LDTs that fall under the FDA's enforcement discretion policy. In October 2014, the FDA issued draft
guidance, entitled "Framework for Regulatory Oversight of LDTs," proposing a risk-based framework of oversight and a phased-
in enforcement of premarket review requirements for most LDTs. In 2016, the FDA announced that it would not be finalizing the
guidance.

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In January 2017, the FDA issued a "Discussion Paper on Laboratory Developed Tests" following input it received from
multiple stakeholders who had commented on its 2014 draft guidance. The FDA specifically states in its Discussion Paper that the
proposals contained in the document do not represent a final version of the LDT draft guidance documents and are only designed
to provide a possible approach to spark further dialogue. The suggested LDT framework could grandfather many types of LDTs
without requiring new premarket review or quality management requirements. It also suggests a four-year phased implementation
of the premarket review requirements for some types of tests. In a December 2018 statement, the FDA said that there is a need
for “a unified approach to the regulation of in vitro clinical tests to protect patient safety, support innovation, and keep pace with
the rapidly evolving technology that’s helping us find new treatments for disease.” The FDA listed key principles of an approach
it would support.

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

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

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

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

Before we begin to label and market some of our products for use as clinical diagnostics in the United States, unless an
exemption applies, we are required to obtain clearance from FDA by submitting a premarket notification under section 510(k) of
the FDC Act, or 510(k), or approval from FDA by submitting a PMA. We may also be able to obtain marketing authorization
through a de novo classification process rather than through a PMA if the 510(k) pathway is not available. In September 2013,
Prosigna obtained FDA 510(k) clearance as a prognostic indicator for distant recurrence-free survival at ten years in post-

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menopausal women with Stage I/II lymph node-negative or Stage II lymph node-positive (1-3 positive nodes), hormone receptor-
positive breast cancer to be treated with adjuvant endocrine therapy alone, when used in conjunction with other clinicopathological
factors after they have undergone surgery in conjunction with locoregional treatment and consistent with the standard of care.

In August 2014, the FDA issued a final guidance document titled In Vitro Companion Diagnostic Devices. In the guidance,
FDA defined an IVD companion diagnostic device as an in vitro diagnostic device that provides information that is essential for
the safe and effective use of a corresponding therapeutic product. The use of an IVD companion diagnostic device with a therapeutic
product is stipulated in the instructions for use in the labeling of both the diagnostic device and the corresponding therapeutic
product, including the labeling of any generic equivalents of the therapeutic product. FDA stated that an IVD companion diagnostic
should be submitted for review and approved or cleared through an appropriate device submission contemporaneously with the
review and approval of the therapeutic product to facilitate concurrent review. The FDA guidance also stated that while there
may be cases when a companion diagnostic could come to market through the 510(k) pathway, FDA expects that most companion
diagnostics will be Class III devices. Class III devices generally require the approval of a PMA before they can be marketed. An
IVD diagnostic device that is not a companion diagnostic device because it is not essential for the safe and effective use of a
corresponding therapeutic product, may still be beneficial for use with a therapeutic product but may not be identified in the labeling
of the therapeutic product. It is possible that revenue from a cleared or approved beneficial or complementary IVD diagnostic
device may be less than revenue from a cleared or approved IVD companion diagnostic device. There is no assurance that we
would be able to obtain clearance or approval for any of our diagnostic devices in development as a companion diagnostic device.

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

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

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

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

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

35

nCounter systems for clinical use in that jurisdiction, as the lack of a robust menu of available diagnostic tests would make those
systems less attractive to testing laboratories.

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

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

Certain of our products are regulated as in vitro diagnostic medical devices, including Prosigna and the nCounter FLEX
Analysis System. Accordingly, we and certain of our contract manufacturers are subject to ongoing International Organization for
Standardization, or ISO, obligations as well as requirements under the FDC Act and device regulations enforced by the FDA and
other statutory and regulatory requirements enforced by other government authorities. These may include routine inspections by
Notified Bodies, FDA, and other health authorities, of our manufacturing facilities and our records for compliance with standards
such as ISO 13485 and QSR regulations, which establish extensive requirements for quality assurance and control as well as
manufacturing and change control procedures, among other things. We are also subject to other regulatory obligations, such as
registration of our company offices and facilities and the listing of our devices with the FDA; continued adverse event and
malfunction reporting; reporting certain corrections and removals; and labeling and promotional requirements. Other regulatory
bodies may also issue guidelines and regulations that could impact the development of our products, including companion diagnostic
tests. For example, the European Medicines Agency, a European Union agency which is responsible for the scientific evaluation
of medicines used in the European Union, recently launched an initiative to determine guidelines for the use of genomic biomarkers
in the development and life-cycle of drugs. On April 5, 2017, the European Union Parliament passed Regulation (EU) 2017/746,
referred to as the IVD Device Regulation, or IVDR, which increases the regulatory requirements applicable to in vitro diagnostics
in the EU and would require that we re-classify and obtain approval, registration, or clearance for our existing CE-marked IVD
products within a five-year grace period (by May 25, 2022).

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

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

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

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

We believe our primary competition in pulmonology with our Percepta and Envisia classifiers will similarly come from
traditional methods used by physicians to diagnose the related diseases. For the Percepta test, we expect competition from companies

36

focused on lung cancer such as Oncocyte Corporation and Biodesix, Inc. We believe our principal competitor in the breast cancer
diagnostics market is Exact Sciences, Inc. (having combined with Genomic Health, Inc.), which currently commands a substantial
majority of the market. As we expand our portfolio of tests to address clinical questions across the clinical care continuum, we
may also face competition from companies focused on screening at-risk patients for cancer or companies informing treatment
decisions such as Guardant Health or GRAIL. Competition could also emerge using alternative samples, such as blood, urine or
sputum. However, such “liquid biopsies” are currently being used to gauge risk of recurrence or response to treatment in patients
already diagnosed with lung cancer.

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

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

To compete successfully, we must be able to demonstrate, among other things, that our diagnostic test results are accurate

and cost effective, and we must secure a meaningful level of reimbursement for our products.

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

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

Our success depends largely on the skills, experience and performance of key members of our executive management
team and others in key management positions. The efforts of each of these persons together will be critical to us as we continue
to develop our technologies and test processes and focus on our growth. If we were to lose one or more of these key employees,
we may experience difficulties in competing effectively, developing our technologies and implementing our 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 science businesses, particularly in the San Francisco Bay Area. Our
success in the development and commercialization of advanced diagnostics requires a significant medical and clinical staff to
conduct studies and educate physicians and payers on the merits of our tests in order to achieve adoption and reimbursement. We
are in a highly competitive industry to attract and retain this talent. Additionally, our success depends on our ability to attract and
retain qualified sales people. We recently significantly expanded our sales force as we invest in our multi-product sales strategy,
which includes assignment of a single contact to successfully develop and implement relationships with our customers. There can
be no assurance that we will be successful in maintaining and growing our business. Additionally, as we increase our sales channels
for new tests we commercialize, including the Percepta and Envisia tests, or acquire, such as Prosigna, we may have difficulties
recruiting and training additional sales personnel or retaining qualified salespeople, which could cause a delay or decline in the
rate of adoption of our tests. As a public company located in the San Francisco Bay Area, we also face intense competition for
highly skilled finance and accounting personnel. If we are unable to attract and retain finance and accounting personnel experienced
in public company financial reporting, we risk being unable to close our books and file our public documents on a timely basis.
Finally, our business requires specialized capabilities in reimbursement, billing, and other areas and there may be a shortage of
qualified individuals. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we
may experience constraints that could adversely affect our ability to support our research and development, clinical laboratory,

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sales and reimbursement, billing and finance efforts. All of our employees are at will, which means that either we or the employee
may terminate their employment at any time. We do not carry key man insurance for any of our employees.

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

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

Several factors make the billing process complex, including:

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

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

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

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

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

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

changes to billing codes used for our tests;

incorrect or missing billing information; and

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

We use standard industry billing codes, known as CPT codes, to bill for cytopathology. In addition, we use the CPT code
81545 to bill for our Afirma classifier. CPT codes do not exist for our other proprietary molecular diagnostic tests. Therefore,
until such time that we are assigned and are able to use a designated CPT code specific to Percepta and Envisia, we use “unlisted”
codes for claim submissions, which can lead to delays in payers adjudicating our claims or denying payment altogether. Moreover,
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 can occur with claims submission, third-party transmission or in the processing of the claim by the payer. Claim
adjudication errors may result in a delay in payment processing or a reduction in the amount of the payment received. Coding
changes, therefore, may have an adverse effect on our revenues. Even when we receive a designated CPT code specific to our
tests, such as the 81545 code for the Afirma GEC that became effective January 1, 2016, there can be no assurance that payers
will recognize these codes in a timely manner or that the process of transitioning to such a code and updating their billing systems
and ours will not result in errors, delays in payments and a related increase in accounts receivable balances.

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

Correct coding is subject to the coding policies of the American Medical Association CPT Editorial Panel, or AMA CPT.
With respect to claims submitted to Medicare and Medicaid, it is also subject to coding policies developed through the National
Correct Coding Initiative, or NCCI. Other payers may develop their own payer-specific coding policies. The broader coding
policies of the AMA CPT, NCCI, and other payers are subject to change. For instance, the NCCI recently adopted an update to

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its Coding Policy Manual effective January 1, 2019, to limit instances when multiple codes may be billed for molecular pathology
testing. Although the NCCI appears to have moderated this change in its updates effective January 1, 2020, such coding policy
changes may negatively affect our revenues and cash flow.

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

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

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

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

We acquired several international sales employees from NanoString, and expect to build upon this team as we offer

additional tests internationally in the future. If our internal sales force is not successful, however, or new additions to our sales
team fail to gain traction among our customers, we may not be able to increase market awareness and sales of our molecular
diagnostic tests. If we fail to establish our molecular diagnostic tests in the marketplace, it could have a negative effect on our
ability to sell subsequent molecular diagnostic tests and hinder the desired expansion of our business. We have growing,
however limited, historical experience forecasting the direct sales of our molecular diagnostics products. Our ability to produce
test volumes that meet customer demand is dependent upon our ability to forecast accurately and plan production capacities
accordingly.

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

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

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

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expend significant funds to conduct substantial research and development;

conduct successful analytical and clinical studies;

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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:

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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. At any point, we may abandon development of a product candidate or we may be required
to expend considerable resources repeating clinical studies, which would adversely affect the timing for generating potential
revenue from a new product and our ability to invest in other products in our pipeline. If a clinical validation study fails to
demonstrate the prospectively-defined endpoints of the study or if we fail to sufficiently demonstrate analytical validity, we might
choose to abandon the development of the product, which could harm our business. In addition, competitors may develop and
commercialize competing products or technologies faster than us or at a lower cost.

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

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

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

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

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

Our Loan and Security Agreement restricts our ability to, among other things, incur liens, make investments, incur
indebtedness, merge with or acquire other entities, dispose of assets, make dividends or other distributions to holders of its equity
interests, engage in any new line of business, or enter into certain transactions with affiliates, in each case subject to certain
exceptions. It also requires us to achieve certain revenue levels tested quarterly on a trailing twelve-month basis. However, failure
to maintain the revenue levels will not be considered a default if the sum of our unrestricted cash and cash equivalents maintained

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with Silicon Valley Bank and amount available under the revolving line of credit is at least $40.0 million. Our ability to comply
with these and other covenants is dependent upon a number of factors, some of which are beyond our control.

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

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

Our operations are subject to other extensive federal, state, local, and foreign laws and regulations, all of which are subject

to change. These laws and regulations currently include, among others:

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

• Medicare billing and payment regulations applicable to clinical laboratories, including requirements to have an active

CLIA certificate;

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

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

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

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

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

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

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

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

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

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

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

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

enforcing our intellectual property rights.

We have adopted policies and procedures designed to comply with applicable laws and regulations. In the ordinary course
of our business, we conduct internal reviews of our compliance with these laws. Our compliance with some of these laws and
regulations is also subject to governmental review. The growth of our business and sales organization and our expansion outside
of the United States may increase the potential of violating these laws or our internal policies and procedures. We believe that we
are in material compliance with all statutory and regulatory requirements, but there is a risk that one or more government agencies
could take a contrary position.

In recent years U.S.Attorneys’Offices have increased scrutiny of the healthcare industry, as have Congress, the Department
of Justice, the Department of Health and Human Services’ Office of the Inspector General and the Department of Defense. These
bodies have all issued subpoenas and other requests for information to conduct investigations of, and commenced civil and criminal
litigation against, healthcare companies based on financial arrangements with health care providers, regulatory compliance, product
promotional practices and documentation, and coding and billing practices. Whistleblowers have filed numerous qui tam lawsuits
against healthcare companies under the federal and state False Claims Acts in recent years, in part because the whistleblower can
receive a portion of the government’s recovery under such suits.

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

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

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

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

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

• multiple, conflicting and changing laws and regulations such as tax laws, privacy laws, export and import restrictions,

employment laws, regulatory requirements and other governmental approvals, permits and licenses;

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

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

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

including infrastructure conditions and

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

including proper sample collection techniques,

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

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

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

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

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

revenue and results of operations.

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

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

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

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additional clinical laboratories to provide Prosigna testing services, we may not be successful selling Prosigna and our future
revenue prospects may be adversely affected.

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

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

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

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

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

We expect continued capital expenditures and operating losses over the next few years as we expand our infrastructure,
commercial operations and research and development activities. We may seek to raise additional capital through equity offerings,
debt financings, collaborations or licensing arrangements. Additional funding may not be available to us on acceptable terms, or
at all. If we raise funds by issuing equity securities, dilution to our stockholders could result. Any equity securities issued also may
provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities issued
or borrowings could impose significant restrictions on our operations. The incurrence of additional indebtedness or the issuance
of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such
as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license
intellectual property rights, and other operating restrictions that could adversely affect our ability to conduct our business. Our
Loan and Security Agreement imposes restrictions on our operations, increases our fixed payment obligations, and has restrictive
covenants. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market
price of our common stock to decline. In the event that we enter into collaborations or licensing arrangements to raise capital, we
may be required to accept unfavorable terms. These agreements may require that we relinquish or license to a third-party on
unfavorable terms our rights to technologies or product candidates that we otherwise would seek to develop or commercialize
ourselves, or reserve certain opportunities for future potential arrangements when we might be able to achieve more favorable
terms. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one
or more research and development programs or selling and marketing initiatives. In addition, we may have to work with a partner
on one or more of our products or development programs, which could lower the economic value of those programs to our company.

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

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

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

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

Recent developments in Europe have created compliance uncertainty regarding the processing of personal data from
Europe. For example, the General Data Protection Regulation, or GDPR, which became effective in the European Union on May
25, 2018, applies to our activities conducted from an establishment in the EU or related to products and services that we offer to
European Union users. The GDPR creates new compliance obligations applicable to our business, which could cause us to change
our business practices, and increases financial penalties for noncompliance (including possible fines of up to 4% of global annual
turnover for the preceding financial year or €20 million (whichever is higher) for the most serious infringements). As a result, we
may need to modify the way we treat such information.

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

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

45

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

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

We apply for and in-license patents covering our products and technologies and uses thereof, as we deem appropriate,
however we may fail to apply for patents on important products and technologies in a timely fashion or at all, or we may fail to
apply for patents in potentially relevant jurisdictions. Our issued patents expire between 2029 and 2035 and are related to methods
used in thyroid diagnostics, lung diagnostics, breast cancer diagnostics, and the nCounter FLEX analysis platform.

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

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

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

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

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

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

46

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

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

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

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

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

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

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

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

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

47

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

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

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

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

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

To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income,
if any, until such unused losses expire. We may be limited in the portion of NOL carryforwards that we can use in the future to
offset taxable income for U.S. federal and state income tax purposes, and federal tax credits to offset federal tax liabilities. Sections
382 and 383 of Internal Revenue Code limit the use of NOLs and tax credits after a cumulative change in corporate ownership of
more than 50% occurs within a three-year period. The limitation could prevent a corporation from using some or all its NOL and
tax credits before they expire within their normal 20-year lifespan, as it places a formula limit of how much NOL and tax credits
a loss corporation can use in a tax year. In the event we have undergone an ownership change under Section 382 of the Internal
Revenue Code, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable
income may become subject to limitations, which could potentially result in increased future tax liability to us.

48

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

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

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

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

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

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

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

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

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

As a public company, we are required to maintain internal control over financial reporting and to report any material
weaknesses in such internal control. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the
effectiveness of our internal control over financial reporting and provide a management report on our internal controls on an annual
basis. If we have material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis
and our financial statements may be materially misstated. We have only recently compiled the systems, processes and documentation
necessary to comply with Section 404 of the Sarbanes-Oxley Act. We will need to maintain and enhance these processes and
controls as we grow, and we will require additional management and staff resources to do so. Additionally, even if we conclude
our internal controls are effective for a given period, we may in the future identify one or more material weaknesses in our internal

49

controls, in which case our management will be unable to conclude that our internal control over financial reporting is effective.
We are now required to include an attestation report from our independent registered public accounting firm on the effectiveness
of our internal control over financial reporting annually. Even if our management concludes that our internal control over financial
reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with
respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed.

If we are unable to conclude that our internal control over financial reporting is effective, or if our auditors were to express
an adverse opinion on the effectiveness of our internal control over financial reporting because we had one or more material
weaknesses, investors could lose confidence in the accuracy and completeness of our financial disclosures, which could cause the
price of our common stock to decline. Irrespective of compliance with Section 404, any failure of our internal control over financial
reporting could have a material adverse effect on our reported operating results and harm our reputation. Internal control deficiencies
could also result in a restatement of our financial results.
Risks Related to Our Common Stock

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

The trading price of our common stock is likely to continue to be highly volatile and could be subject to wide fluctuations

in response to various factors, some of which are beyond our control. These factors include:

•

•

•

•

•

•

•

•

•

•

•

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

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

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

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

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

actual or anticipated changes in regulatory oversight of our products;

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

commencement of, or our involvement in, litigation;

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

any major change in our management; and

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

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

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

The trading market for our common stock will depend in part on the research and reports that equity research analysts
publish about us, our business and our competitors. We do not control these analysts or the content and opinions or financial models
included in their reports. Securities analysts may elect not to provide research coverage of our company, and such lack of research
coverage may adversely affect the market price of our common stock. The price of our common stock could also decline if one

50

or more equity research analysts downgrade our common stock or if those analysts issue other unfavorable commentary or cease
publishing reports about us or our business. If one or more equity research analysts cease coverage of our company, we could lose
visibility in the market, which in turn could cause our stock price to decline.

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

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

•

•

•

•

•

•

•

•

•

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

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

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

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

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

provide that our directors may be removed only for cause;

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

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

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

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

51

On April 29, 2015, we signed a non-cancelable lease agreement for approximately 59,000 square feet to serve as our South
San Francisco, California headquarters and laboratory. The lease began in June 2015 and ends in March 2026, and contains extension
of lease term and expansion options. Certain expansion options were waived by us on February 8, 2017 in exchange for consideration
of $500,000. We also lease approximately 10,400 square feet of office and laboratory space in Austin, Texas, under a lease that
expires in January 2029 and includes options for expansion and early termination in 2025.

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 course of business.

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded on the Nasdaq Global Market under the symbol "VCYT".

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 declare dividends 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 credit agreement restrict 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 will further restrict our ability to declare or pay dividends on our common stock.

Recent Sale of Unregistered Securities and Use of Proceeds

Recent Sale of Unregistered Securities

On December 3, 2019, we issued 376,732 shares of our common stock as consideration to NanoString Technologies, Inc.
in connection with our acquisition of certain of its assets. The sales of these securities were exempt from registration under the
Securities Act of 1933, as amended, or the Securities Act, in reliance upon Section 4(a)(2) of the Securities Act.

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 to Regulation 14A or 14C under the Securities Exchange Act of 1934, as amended, or the Exchange Act,
or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under
the Securities Act or the Exchange Act, except to the extent we specifically incorporate 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 the date specified in each of our common stock, the Nasdaq Global Market Index, and the Nasdaq
Biotechnology Index for the period commencing on October 30, 2013 (the first day of trading of our common stock) and ending
on December 31, 2019. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of
future performance of our common stock.

52

Comparison of Cumulative Total Stockholder Return

$250
$225
$200
$175
$150
$125
$100
$75
$50
$25

4

1

0

1 / 2

2 / 3

1

5

1

0

1 / 2

2 / 3

1

6

1

0

1 / 2

2 / 3

1

7

1

0

1 / 2

2 / 3

1

8

1

0

1 / 2

2 / 3

1

9

1

0

1 / 2

2 / 3

1

Veracyte, Inc.

NASDAQ Global Market Index

NASDAQ Biotechnology Index

December 31,
2014

December 31,
2015

December 31,
2016

December 31,
2017

December 31,
2018

December 31,
2019

Veracyte, Inc.

Nasdaq Global Market
Index

Nasdaq Biotechnology
Index

$

$

$

73.00

121.00

148.00

$

$

$

54.00

128.00

165.00

$

$

$

58.00

137.00

129.00

$

$

$

49.00

176.00

157.00

$

$

$

95.00

169.00

147.00

$

$

$

211.00

229.00

184.00

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 of Operations" and our audited consolidated financial statements and related notes included
elsewhere in this annual report. The selected consolidated balance sheet data at December 31, 2019 and 2018 and the selected
consolidated statements of operations data for each of the years ended December 31, 2019, 2018 and 2017 have been derived from
our audited consolidated financial statements that are included elsewhere in this report. The selected consolidated balance sheet
data at December 31, 2017, 2016 and 2015 and the selected consolidated statements of operations data for the years ended
December 31, 2016 and 2015 have been derived from our audited consolidated financial statements not included in this report.
The financial data are historical and are not necessarily indicative of results to be expected in any future period (in thousands,
except share and per share data and genomic classifiers reported):

53

Consolidated Statements of Operations
Data:
Revenue:

Testing revenue

Product revenue

Biopharmaceutical revenue

Collaboration revenue

Total revenue

Operating expenses:

Cost of testing revenue(1)
Cost of product revenue
Research and development(1)
Selling and marketing(1)
General and administrative(1)
Intangible asset amortization

Total operating expenses(1)
Loss from operations

Interest expense

Other income, net

Net loss and comprehensive loss

Net loss per common share, basic and diluted

Shares used in computing net loss per common

$

$

share, basic and diluted

Other Operating Data:
Reported genomic test volume

_____________________________________________

2019

2018

2017

2016

2015

Year Ended December 31,

$

107,355

$

91,058

$

71,953

$

65,085

$

49,503

923

8,090

4,000

—

950

—

—

—

—

—

—

—

—

—

—

$

120,368

$

92,008

$

71,953

$

65,085

$

49,503

36,077

446

14,851

53,691
29,029

1,401

135,495

(15,127)

(677)

3,205

33,078

—

14,820

41,313
23,963

1,067

114,241

(22,233)

(1,963)

1,197

28,195

—

13,881

32,260
23,088

1,067

98,491

(26,538)

(4,941)

476

25,462

—

15,324

28,248
23,787

1,067

93,888

(28,803)

(2,757)

202

21,497

—

12,796

25,293
22,583

800

82,969

(33,466)

(378)

140

(12,599) $

(22,999) $

(31,003) $

(31,358) $

(33,704)

(0.27) $

(0.62) $

(0.91) $

(1.09) $

(1.30)

46,138,177

37,020,246

33,925,617

28,830,472

25,994,193

39,612

31,710

26,026

23,237

19,421

(1) Includes stock-based compensation as follows:

Cost of testing revenue

Research and development

Selling and marketing

General and administrative

Total stock-based compensation

Year Ended December 31,

2019

2018

2017

2016

2015

$

$

277

$

130

$

133

$

126

$

1,856

2,938

4,736

1,018

1,866

2,944

1,495

1,899

3,090

1,322

1,594

3,336

9,807

$

5,958

$

6,617

$

6,378

$

100

1,178

1,326

2,998

5,602

54

Consolidated Balance Sheets Data:

Cash and cash equivalents

$

Working capital

Total assets

Accumulated deficit

Total stockholders' equity

As of December 31,

2019
159,317

170,218

275,212

2018

2017

2016

2015

$

77,995

$

33,891

$

59,219

$

83,893

120,638

41,900

78,669

62,093

101,034

39,084

33,192

75,247

(246,685)

(234,086)

(211,087)

(180,084)

(148,726)

239,455

79,755

37,225

59,581

51,252

55

ITEM 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 related notes 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 risks and uncertainties. Our actual results may differ materially
from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified
below and those set forth under the section entitled "Risk Factors" in Item 1A, and other documents we file with the Securities and
Exchange Commission. Historical results are not necessarily indicative of future results.

Overview

We are a leading genomic diagnostics company that is creating value through innovation. We were founded in 2008 with a
mission of improving diagnostic accuracy. Today, our growing menu of tests leverage advances in genomic science and technology
to improve care throughout the patient journey, enabling more confident diagnostic, prognostic and treatment decisions in cancer
and other challenging diseases. We are creating new standards of care by enabling more patients to avoid risks of unnecessary
invasive procedures and removing costs from the healthcare system, while speeding the time to diagnosis and treatment decisions.

We perform our genomic tests for thyroid cancer, lung cancer and idiopathic pulmonary fibrosis, or IPF, in our CLIA-certified
laboratory in South San Francisco, California. In December 2019, we announced our acquisition from NanoString Technologies,
Inc., or NanoString, of the exclusive global diagnostics license to the nCounter FLEX Analysis System, as well as the Prosigna
breast cancer prognostic gene signature assay, which is commercially available, and the LymphMark lymphoma subtyping assay,
which is in development. Both tests are designed for use on the nCounter system. We believe this strategic transaction positions
us to expand our business globally with a broad menu of advanced genomic tests that may be offered as distributed kits and
performed in local laboratories worldwide. We believe our current and pipeline products address a collective $40 billion global
market.

We currently offer five commercialized genomic tests that are changing disease diagnosis and patient care. All five tests are
available in the United States and one is available internationally. These include the Afirma Genomic Sequencing Classifier, or
GSC (its predecessor was the Afirma Gene Expression Classifier, or GEC) for thyroid cancer; the Percepta GSC (its predecessor
was the Percepta Bronchial Genomic Classifier) for lung cancer; the Envisia Genomic Classifier for IPF; the Afirma Xpression
Atlas, which provides information on the most common and emerging gene alterations associated with thyroid cancer, enabling
physicians to confidently tailor surgical and treatment decisions at time of diagnosis; and the Prosigna breast cancer test for assessing
risk of distant recurrence, which is available for use on the nCounter platform in the United States and internationally.

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

Patients access our tests through their physician. Our Afirma, Percepta and Envisia tests are used as part of the diagnostic
process and genomic testing services are performed in our CLIA laboratory located in San Francisco, California. Cytopathology
services for Afirma testing are performed in our reference laboratory in Austin, Texas. The Prosigna test is indicated in female
breast cancer patients who have undergone surgery in conjunction with locoregional treatment consistent with standard of care.
This in vitro diagnostic test is performed on the nCounter Flex Analysis System in laboratories worldwide, as well as in the United
States.

Fourth Quarter and Full-Year 2019 Financial Results

56

For the three months ended December 31, 2019, compared to the prior year:

•
•
•
•
•
•
•

Total Revenue was $29.7 million, an increase of 15%;
Gross Margin was 66%, unchanged;
Operating Expenses, Excluding Cost of Revenue, were $27.8 million, an increase of 38%;
Net Loss and Comprehensive Loss was ($7.5) million, an increase of 140%;
Basic and Diluted Net Loss Per Common Share was ($0.15), an increase of 88%;
Net Cash Provided by Operating Activities was $1.8 million, compared to $1.2 million used; and
Cash and Cash Equivalents was $159.3 million at December 31, 2019.

For the year ended December 31, 2019, compared to the prior year:

•
•
•
•
•
•

Total Revenue was $120.4 million, an increase of 31%;
Gross Margin was 70%, an increase of six percentage points;
Operating Expenses, Excluding Cost of Revenue, were $99.0 million, an increase of 22%;
Net Loss and Comprehensive Loss was ($12.6) million, an improvement of 45%;
Basic and Diluted Net Loss Per Common Share was ($0.27), an improvement of 56%; and
Net Cash Used in Operating Activities was $3.2 million, an improvement of 76%.

2019 Full-Year and Recent Business Highlights

Commercial Growth:

•

•

•

•

•

•

•

•

Achieved strong total revenue growth across our testing and product portfolio delivering $29.5 million in the fourth
quarter and $108.3 million for 2019, an increase of 16% and 19%, respectively, compared to the prior year.
Accelerated pulmonology testing revenue to $2.0 million and $5.5 million for the fourth quarter and full year, respectively,
a 123% and 174% increase compared to prior year.
Grew total genomic volume (Afirma, Percepta and Envisia) by 18% to 10,846 tests in the fourth quarter of 2019 and by
25% to 39,612 tests in 2019, compared to prior year.
Increased genomic volume for our pulmonology products by 136% in 2019 compared to prior year, achieving growth
targets for both the Percepta and Envisia classifiers.
Received final Medicare coverage in March 2019 for the Envisia classifier and published strong clinical validation and
clinical utility data in The Lancet Respiratory Medicine, propelling nationwide commercial expansion of the test in the
second half of 2019.
Expanded payer contracts by 14.4 million lives, making Veracyte an in-network genomic testing provider to health plans
representing over 225 million members.
Continued to build an extensive library of clinical data across our portfolio in 2019, including 8 publications and 11
presentations at leading medical meetings, demonstrating our Afirma and pulmonology tests’ performance and clinical
utility.
Eleven abstracts were presented at the San Antonio Breast Cancer Symposium in December 2019, including data showing
a benefit of Prosigna® over other genomic testing to identify patients’ long-term risk of developing distant metastases. In
addition, data were presented showing the test’s ability to identify patients with intrinsic breast cancer subtypes that may
potentially benefit from CDK4/6 inhibitors in place of standard chemotherapy.

Biopharmaceutical Collaborations/Pipeline Advancement:

•

•

•

In January 2019, announced a long-term strategic collaboration with Johnson & Johnson Innovation LLC to advance the
development and commercialization of novel diagnostic tests to detect lung cancer at its earliest stages, when the disease
is most treatable.
Presented preliminary data at the American College of Chest Physicians (CHEST) annual meeting for our first-of-its-
kind noninvasive nasal swab classifier for improved lung cancer diagnosis. The test, being developed through our Johnson
& Johnson collaboration, is expected to launch in early 2021.
Launched the second-generation Percepta GSC, completing the transition of our core classifiers to our RNA whole-
transcriptome sequencing platform.

57

•

Announced a multi-year collaboration with Acerta Pharma, the hematology research and development arm of AstraZeneca
plc, to provide genomic information that will support the biopharmaceutical company’s development of oncology
therapeutics in lymphoma.

Global Expansion:

•

Acquired the exclusive global diagnostic rights to the NanoString nCounter FLEXAnalysis System, as well as the Prosigna
breast cancer assay and the in-development LymphMark lymphoma subtyping test. We believe this transaction positions
us to access a $40 billion global market for our current and pipeline products, by offering a broad menu of advanced
genomic tests in oncology and other indications using a distributed-kit model.

Factors Affecting Our Performance

Reported Genomic Test Volume

Our performance depends on the number of genomic tests that we perform and report as completed in our CLIA laboratories.

Factors impacting the number of tests that we report as completed include, but are not limited to:

•
•
•

•
•
•

•

the number of samples that we receive that meet the medical indication for each test performed;
the quantity and quality of the sample received;
receipt of the necessary documentation, such as physician order and patient consent, required to perform, bill and collect
for our tests;
the patient's ability to pay or provide necessary insurance coverage for the tests performed;
the time it takes us to perform our tests and report the results;
the seasonality inherent in our business, such as the impact of work days per period, timing of industry conferences
and the timing of when patient deductibles are exceeded, which also impacts the reimbursement we receive from
insurers; and
our ability to obtain prior authorization or meet other requirements instituted by payers, benefit managers, or regulators
necessary to be paid for our tests.

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

Continued Adoption of and Reimbursement for our Products

Revenue growth depends on our ability to secure coverage decisions, achieve broader reimbursement at increased levels
from third-party payers, expand our base of prescribing physicians and increase our penetration in existing accounts. Because
some payers consider our products experimental and investigational, we may not receive payment for tests and payments we
receive may not be at acceptable levels. We expect our revenue growth to increase if more payers make a positive coverage decision
and as payers enter into contracts with us, which should enhance our revenue and cash collections. To drive increased adoption of
our products, we increased our sales force and marketing efforts over the last several years. Our sales team is structured to sell
all of our products; we do not maintain a separate sales force for each product. If we are unable to expand the base of prescribing
physicians and penetration within these accounts at an acceptable rate, or if we are not able to execute our strategy for increasing
reimbursement, we may not be able to effectively increase our revenue. We expect to continue to see pressure from payers to limit
the utilization of tests, generally, and we believe more payers are deploying cost containment tactics, such as pre-authorization,
reduction of the payer portion of reimbursement and employing laboratory benefit managers to reduce utilization rates.

Integrating acquired assets and advances to our collaborations

Revenue growth, operational results and advances to our business strategy depends on our ability to integrate the assets
acquired into our existing business. The integration of acquired assets may impact our revenue growth, increase the cost of
operations, cause significant write-offs of intangible assets, or may require management resources that otherwise would be available
for ongoing development of our existing business. The integration of assets acquired from NanoString in December 2019 may

58

impact our revenue and operating results through integration of a sales force, development of a product supply operation and the
expansion of our business internationally with a broad menu of advanced genomic tests that may be offered.

Revenue growth or reimbursement from our collaborations depends on our ability to deliver services or information and
achieve milestones required from our collaborative partners. Our collaboration parters pay us for the provision of data, other
services and the achievement of milestones. Under a collaboration with Johnson & Johnson in 2018, we provided data services
required under this agreement for $7.0 million in 2019, however, there remains $9.0 of revenue associated with development and
commercialization milestones yet to be achieved.

How We Recognize Revenue

Testing Revenue

We commenced recognizing revenue in accordance with the provisions of ASC 606, Revenue from Contracts with Customers
starting January 1, 2018. Prior to January 1, 2018, we recognized revenue in accordance with the provisions of ASC 954-605,
Health Care Entities - Revenue Recognition.

Most of our revenue is generated from the provision of diagnostic services. These services are completed upon the delivery
of test results to the prescribing physician, at which time we bill for the services. We recognize revenue related to billings on an
accrual basis based on estimates of the amount that will ultimately be realized. In determining the amount to accrue for a delivered
test, we consider factors such as payment history, payer coverage, whether there is a reimbursement contract between the payer
and us, payment as a percentage of agreed upon rate (if applicable), amount paid per test and any current developments or changes
that could impact reimbursement. These estimates require significant judgment by management.

As of December 31, 2019, cumulative amounts billed at list price for tests processed which were not recognized as revenue
upon delivery of a patient report because our accrual revenue recognition criteria were not met and for which we have not collected
cash or written off as uncollectible, totaled approximately $159.3 million. Of this amount, we did not collect any amounts in the
year ended December 31, 2019 and we have no expectation of future collection because we began accruing for substantially all
revenue upon delivery of a patient report in the third quarter of 2016.

Generally, cash we receive is collected within 12 months of the date the test is billed. We cannot provide any assurance as
to when, if ever, or to what extent any of these amounts will be collected. Notwithstanding our efforts to obtain payment for these
tests, payers may deny our claims, in whole or in part, and we may never receive payment for these tests.

We bill list price regardless of contract rate, but only recognize revenue from amounts that we estimate are collectible and
meet our revenue recognition criteria. Revenue may not be equal to the billed amount due to a number of factors that we consider
when determining revenue accrual rates, including differences in reimbursement rates, the amounts of patient co-payments and
co-insurance, the existence of secondary payers, claims denials and the amount we expect to ultimately collect. Finally, when we
increase our list price, it will increase the cumulative amounts billed but may not positively impact accrued revenue. In addition,
payer contracts generally include the right of offset and payers may offset payments prior to resolving disputes over tests performed.

Generally, we calculate the average reimbursement from our products from all payers, for tests that are on average a year
old, since it can take a significant period of time to collect from some payers. Except in situations where we believe the rate we
reasonably expect to collect to vary due to a coverage decision, contract, more recent reimbursement data or evidence to the
contrary, we use an average of reimbursement for tests provided over four quarters as it reduces the effects of temporary volatility
and seasonal effects. Thus, the average reimbursement per product represents the total cash collected to date against genomic
classifier tests, including variants, performed during the relevant period divided by the number of these tests performed during
that same period.

The average genomic classifier reimbursement rate will change over time due to a number of factors, including medical
coverage decisions by payers, the effects of contracts signed with payers, changes in allowed amounts by payers, our ability to
successfully win appeals for payment, and our ability to collect cash payments from third-party payers and individual patients.
Historical average reimbursement is not necessarily indicative of future average reimbursement. For the year ended December 31,
2019, we accrued, on average, between $2,800 and $2,900 for the Afirma genomic classifier tests, including variants, that met our
revenue recognition standard, which was between 90% - 95% of the reported Afirma classifier test volume.

59

From the fourth quarter of 2018 to the fourth quarter of 2019, we accrued between $1.0 million and $2.4 million in revenue

per quarter from providing cytopathology services associated with our Afirma solution.

We incur expense for tests in the period in which the test is conducted and recognize revenue for tests in the period in which

our revenue recognition criteria are met.

Product Revenue

We began recognizing product revenue in December 2019 in accordance with the provisions of ASC 606, Revenue from
Contracts with Customers, when we executed an agreement with NanoString for the exclusive worldwide license to the nCounter
platform for in vitro diagnostic use.

We recognize product revenue when control of the promised goods or services is transferred to our customers, in an amount
that reflects the consideration expected to be received in exchange for those products and services. This process involves identifying
the contract with a customer, determining the performance obligations in the contract, determining the contract price, allocating
the contract price to the distinct performance obligations in the contract, and recognizing revenue when the performance obligations
have been satisfied. A performance obligation is considered distinct from other obligations in a contract when it provides a benefit
to the customer either on its own or together with other resources that are readily available to the customer and is separately
identified in the contract. Performance obligations are considered satisfied once we have transferred control of a product or service
to the customer, meaning the customer has the ability to use and obtain the benefit of the product or service. We recognize product
revenue for satisfied performance obligations only when there are no uncertainties regarding payment terms or transfer of control.
Shipping and handling costs incurred for product shipments are charged to our customers and included in product revenue.

Our products consist of the nCounter Analysis System and related consumables. Services consist of instrument service
contracts and service fees for assay processing. Revenues are presented net of the taxes that are collected from customers and
remitted to governmental authorities.

Biopharmaceutical and Collaboration Revenues

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

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

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

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

The consideration allocated to each distinct performance obligation is recognized as revenue when control of the related
goods is transferred or services are performed. Consideration associated with at-risk substantive performance milestones is
recognized as revenue when it is probable that a significant reversal of the cumulative revenue recognized will not occur. Should

60

there be royalties, we utilize the sales and usage-based royalty exception in arrangements that resulted from the license of intellectual
property, recognizing revenues generated from royalties or profit sharing as the underlying sales occur.

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

Development of Additional Tests

We continue to advance our portfolio of diagnostic tests that leverage innovations in genomic science, sequencing technology
and machine learning methodologies to further improve patient care. In May 2017, we introduced the Afirma GSC, supported by
rigorous clinical validation data showing that the RNAsequencing-based test can help significantly more patients avoid unnecessary
surgery in thyroid cancer diagnosis, compared to the original Afirma classifier. In March 2018, we unveiled our Afirma Xpression
Atlas, which uses the same RNA sequencing data from the platform as the Afirma GSC and enables us to extract rich genomic
content - including gene expression, DNA variants and RNA fusions in over 500 genes that are associated with thyroid cancer -
from thyroid FNA samples. We believe that this offering will provide clinicians with valuable genomic information that may inform
surgery strategy and treatment options for patients with suspected thyroid cancer.

Together with our Afirma GSC and our tests for the BRAF v600E mutation and medullary thyroid cancer, or Malignancy
Classifiers, the Afirma Xpression Atlas rounds out a comprehensive solution for physicians evaluating thyroid nodules. This
innovation also enables us to enter into research collaboration with biopharmaceutical companies, which is intended to support
their development of targeted therapies for genetically defined cancers, including thyroid cancer.

We have also expanded our ability to provide important clinical answers - without the need for surgery - into pulmonology.
Our Percepta Bronchial Genomic Classifier, introduced in April 2015, is the first genomic test to receive Medicare coverage for
use in lung cancer diagnosis, where it improves the performance of diagnostic bronchoscopy. In June 2019, we began making our
“next-generation” Percepta Genomic Sequencing Classifier available to physicians, providing them with expanded lung cancer
risk information that can further guide next steps for patients with suspicious lung nodules, as compared to the Percepta Bronchial
Genomic Classifier.

Additionally, our Envisia Genomic Classifier, launched in October 2016, is the first commercial test to improve the diagnosis
of IPF among patients with a suspected interstitial lung disease. In March 2019, we received final Medicare coverage for the
Envisia classifier through the MolDX program, with an effective date of April 1, 2019.

We also believe our Xpression Atlas platform can be transferred to our pulmonology indications, to further improve patient

care and advance precision medicine in lung cancer and IPF.

We are currently exploring opportunities to utilize the same “field of injury” technology that powers our Percepta classifier
to develop a nasal swab test that can enable earlier lung cancer detection - and ultimately help reduce lung cancer deaths. In October
2019, we announced preliminary clinical data showing for our noninvasive nasal swab classifier - the first test of its kind. The
findings show that the novel genomic test can accurately classify lung cancer risk in patients with lung nodules so that these patients
can obtain the prompt diagnosis and potential treatment they need or may be monitored noninvasively.

Timing of Our Research and Development Expenses

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

61

Financial Overview

Testing Revenue

Through December 31, 2019, we derived a substantial majority of our revenue from the sale of Afirma delivered primarily
to physicians in the United States. We generally invoice third-party payers upon delivery of a patient report to the prescribing
physician. As such, we take the assignment of benefits and the risk of cash collection from the third-party payer and individual
patients. Third-party payers and other customers in excess of 10% of total revenue and their related revenue as a percentage of
total revenue were as follows:

Medicare

UnitedHealthcare

Year Ended December 31,

2019

2018

2017

26%

11%

37%

29%

12%

41%

26%

14%

40%

For tests performed, we recognize the related revenue upon delivery of a patient report to the prescribing physician based
on the amount that we expect to ultimately receive. In determining the amount to accrue for a delivered test, we consider factors
such as payment history, payer coverage, whether there is a reimbursement contract between the payer and us, payment as a
percentage of agreed upon reimbursement rate (if applicable), amount paid per test and any current development or changes that
could impact reimbursement. Upon ultimate collection, the amount received is compared to previous estimates and the amount
accrued is adjusted accordingly. Our ability to increase our revenue will depend on our ability to penetrate the market, obtain
positive coverage policies from additional third-party payers, obtain reimbursement and/or enter into contracts with additional
third-party payers for our current and new tests, and increase reimbursement rates for tests performed. Finally, should the judgments
underlying our estimated reimbursement change, our accrued revenue and financial results could be negatively impacted in future
periods.

Cost of Testing Revenue

The components of our cost of revenue are laboratory expenses, kit costs, sample collection expenses, compensation expense,
license fees and royalties, depreciation and amortization, other expenses such as equipment and laboratory supplies, and allocations
of facility and information technology expenses. Costs associated with performing tests are recorded as the test is processed
regardless of whether and when revenue is recognized with respect to that test. As a result, our cost of revenue as a percentage of
revenue may vary significantly from period to period because we may not recognize all revenue in the period in which the associated
costs are incurred. We expect cost of revenue in absolute dollars to increase as the number of tests we perform increases. However,
we expect that the cost per test will decrease over time due to leveraging fixed costs, efficiencies we may gain as test volume
increases and from automation, process efficiencies and other cost reductions. As we introduce new tests, initially our cost of
revenue will be high as we expect to run suboptimal batch sizes, run quality control batches, test batches, registry samples and
generally incur costs that may suppress or reduce gross margins. This will disproportionately increase our aggregate cost of revenue
until we achieve efficiencies in processing these new tests.

Cost of Product Revenue

Cost of product revenue consists primarily of costs of purchasing instruments and consumables from third-party contract
manufacturers, installation, warranty, service and packaging and delivery costs. In addition, cost of product includes royalty costs
for licensed technologies included in our products, provisions for slow-moving and obsolete inventory and stock-based
compensation expense. Cost of product revenue for instruments and consumables is recognized in the period the related revenue
is recognized. Shipping and handling costs incurred for product shipments are included in cost of product in the consolidated
statements of operations.

Research and Development

Research and development expenses include expenses incurred to develop our technology, collect clinical samples and
conduct clinical studies to develop and support our products and pipeline. These expenses consist of compensation expenses, direct
research and development expenses such as prototype materials, laboratory supplies and costs associated with setting up and

62

conducting clinical studies at domestic and international sites, professional fees, depreciation and amortization, other miscellaneous
expenses and allocation of facility and information technology expenses. We expense all research and development costs in the
periods in which they are incurred. We expect to incur significant research and development expenses as we continue to invest in
research and development activities related to developing additional products and evaluating various platforms. We incurred
research and development expenses on ongoing evidence development for our Afirma, Percepta and Envisia classifiers in 2019 .
We believe a majority of our research and development expenses in and after 2020 will be predominantly in support of our pipeline
products.

Selling and Marketing

Selling and marketing expenses consist of compensation expenses, direct marketing expenses, professional fees, other
expenses such as travel and communications costs and allocation of facility and information technology expenses. We have
expanded our internal sales force as we invest in our multi-product sales strategy to assign a single point of contact to successfully
develop and implement relationships with our customers and increased our marketing spending. We have also incurred increased
selling and marketing expense as a result of investments in our lung product portfolio and believe total selling and marketing
expenses will continue to increase as we launch and promote our new tests.

General and Administrative

General and administrative expenses include compensation expenses for executive officers and administrative, billing and
client service personnel, professional fees for legal and audit services, occupancy costs, depreciation and amortization, and other
expenses such as information technology and miscellaneous expenses offset by allocation of facility and information technology
expenses to other functions. For the year ended December 31, 2019, approximately 67% of the average headcount classified as
general and administrative encompass our billing and customer care teams. We expect general and administrative expenses to
continue to increase as we build our general and administration infrastructure and to stabilize thereafter.

Intangible Asset Amortization

Our finite-lived intangible assets, acquired in business combinations, are being amortized over 5 to15 years, using the straight-
line method. Amortization expense is expected to be approximately $5.1 million per year through 2024 and decrease thereafter.

Interest Expense

Interest expense is attributable to our borrowings under debt agreements and capital leases as well as costs associated with

the pre-payment of debt.

Other Income, Net

Other income, net consists primarily of sublease rental income and interest income from our cash held in interest bearing

accounts.

Critical Accounting Policies 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 been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP.
The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the
reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience
and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions and any such differences may be material. We believe that
the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate
to the more significant areas involving management's judgments and estimates.

Testing Revenue

63

We recognize revenue related to billings on an accrual basis based on estimates of the amount that will ultimately be realized.
In determining the amount to accrue for a delivered test, we consider factors such as payment history, payer coverage, whether
there is a reimbursement contract between the payer and us, payment as a percentage of agreed upon rate (if applicable), amount
paid per test and any current developments or changes that could impact reimbursement. These estimates require significant
judgment by management.

Generally, we determine accrual rates based on the average reimbursement from payers for tests that are on average a year
old, since it can take a significant period of time to collect from some payers. Except in situations where we believe the rate we
reasonably expect to collect to vary due to a coverage decision, contract, more recent reimbursement data or evidence to the
contrary, we use an average of reimbursement for tests provided over four quarters as it reduces the effects of temporary volatility
and seasonal effects.

We use judgment in determining accrual rates and our judgments will continue to evolve in the future as we continue to gain

reimbursement experience.

Biopharmaceutical and Collaboration Revenue

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

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

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

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

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

Other Significant Accounting Policies

Acquisitions

We first determine whether a set of assets acquired and liabilities assumed constitute a business and should be accounted for
as a business combination. If the assets acquired are not a business, we account for the transaction as an asset acquisition. Business
combinations are accounted for by using the acquisition method of accounting. Under the acquisition method, assets acquired, and
liabilities assumed are recorded at their respective fair values as of the acquisition date in our consolidated financial statements.
The excess of the fair value of consideration transferred over the fair value of the net assets acquired is recorded as goodwill.

64

Contingent consideration obligations incurred in connection with a business combination are recorded at fair value on the acquisition
date and remeasured at each subsequent reporting period until the related contingencies are resolved, with the resulting changes
in fair value recorded in earnings.

Finite-lived Intangible Assets

Finite-lived intangible assets consist of intangible assets acquired as part of business combinations. We amortize finite-lived
intangible assets using the straight-line method over their estimated useful lives of five to 15 years, based on management's estimate
of the period over which their economic benefits will be realized, product life and patent life. We test these finite-lived intangible
assets for impairment when events or circumstances indicate a reduction in the fair value below their carrying amounts. There was
no impairment recognized during the years ended December 31, 2019, 2018, or 2017.

Goodwill

Goodwill is reviewed for impairment on an annual basis or more frequently if events or circumstances indicate that it may
be impaired. Our goodwill evaluation is based on both qualitative and quantitative assessments regarding the fair value of goodwill
relative to its carrying value. We have determined that we operate in a single segment and have a single reporting unit associated
with the development and commercialization of diagnostic products. In the event we determine 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 the recorded goodwill over its
implied fair value. We perform our annual evaluation of goodwill during the fourth quarter of each fiscal year. There was no
impairment recognized during the years ended December 31, 2019, 2018, or 2017.

Stock-based Compensation

We recognize stock-based compensation expense for only those shares underlying stock options and restricted stock units
that we expect to vest on a straight-line basis over the requisite service 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 subjective assumptions, including the
option's expected term and stock price volatility. In addition, judgment is also required in estimating the number of stock-based
awards that are expected to be forfeited. Forfeitures are estimated based on historical experience at the time of grant and revised,
if necessary, in subsequent periods if actual forfeitures differ from those estimates. The assumptions used in calculating the fair
value of share-based payment awards represent management's best estimates, but these estimates involve inherent uncertainties
and the application of management's judgment. As a result, if factors change and we use different assumptions, our stock-based
compensation expense could be materially different in the future.

Results of Operations

Comparison of the Years Ended December 31, 2019 and 2018 (in thousands of dollars, except percentages)

65

Revenue:

Testing revenue

Product revenue

Biopharmaceutical revenue

Collaboration revenue

Total revenue

Operating expense:

Cost of testing revenue

Cost of product revenue

Research and development

Selling and marketing

General and administrative

Intangible asset amortization
Total operating expenses

Loss from operations

Interest expense

Other income, net

Net loss and comprehensive loss

Other Operating Data:
Genomic classifiers reported

Revenue

Year Ended December 31,

2019

Change

%

2018

$ 107,355
923

8,090

4,000

16,297

923

7,140

4,000

120,368

$

28,360

18 % $
— %
752 %
— %
31 % $

91,058

—

950

—

92,008

36,077

446

14,851

53,691

29,029

1,401
135,495

(15,127)

(677)

3,205
$ (12,599) $

2,999

446

31

12,378

5,066

334
21,254

7,106

1,286

2,008

10,400

—

41,313

23,963

14,820

33,078

9 %
— %
— %
30 %
21 %
31 %
19 %
32 %
(66)%
168 %
1,197
45 % $ (22,999)

1,067
114,241

(22,233)

(1,963)

39,612

7,902

25 %

31,710

Revenue increased $28.4 million, or 31%, for the year ended December 31, 2019 compared to 2018, primarily due to an
increase in testing revenue from a 25% increase in genomic classifiers reported. We had a $15.8 million increase in testing revenue
for ourAfirma, Percepta, and Envisia classifiers in the year ended December 31, 2019 compared to 2018. We also make adjustments,
as necessary, for testing revenue accrued in prior periods as collections are made if the amount we expect to collect changes. The
adjustment for testing revenue accrued in prior periods was $1.0 million and $2.0 million for the years ended December 31, 2019
and 2018, respectively, a net decrease of $1.0 million between the years. We also recognized $0.9 million from sales of Prosigna,
a product that we acquired from NanoString in December 2019. We recognized $8.1 million of biopharmaceutical revenue compared
to $1.0 million in 2018 primarily due to the performance of data sequencing services for Johnson & Johnson. We also recognized
$4.0 million of collaboration revenue in 2019 due to the achievements of milestones under the agreement we signed with Johnson
& Johnson in December 2018.

Comparison of revenue for the years ending December 31, 2018 and 2017 are included in Item 8 of Part II of the Annual
Report on Form 10-K filed with the Securities and Exchange Commission dated February 25, 2019. There was no product revenue,
biopharmaceutical revenue or collaboration revenue in 2017.

66

Cost of revenue

Comparison of the years ended December 31, 2019 and 2018 was as follows (in thousands of dollars, except percentages):

Year Ended December 31,

2019

Change

%

2018

Cost of testing revenue:

Laboratory expense

Sample collection expense

Compensation expense

License fees and royalties

Depreciation and amortization

Other expenses

Allocations

Total

Cost of product revenue

$

20,166

$

1,108

635

1,492

(795)

220

18

321

2,999

4,801

6,013

10

1,020

1,749

2,318

36,077

446

$

$

$

$

6 % $
15 %
33 %
(99)%
28 %
1 %
16 %
9 % $

19,058

4,166

4,521

805

800

1,731

1,997

33,078

446

— % $

—

Cost of testing revenue increased $3.0 million, or 9%, for the year ended December 31, 2019 compared to 2018. The increase
in laboratory costs was primarily due to a 25% increase in reported genomic classifiers volume, partially offset by lower pricing
on supplies and improved efficiencies following the completion of the transition from the Afirma GEC to Afirma GSC in the third
quarter of 2018. The increase in sample collection costs was primarily related to the increase in the overall volume of samples
received, partially offset by lower shipping costs from modifications to our collection kits. The increase in compensation expense
was primarily due to an average laboratory headcount increase of 16%. The decrease in license fees and royalties was due to the
completed transition to the Afirma GSC in the third quarter of 2018, for which we do not pay license fees as we did in connection
with the Afirma GEC. The increase in depreciation and amortization was from more equipment being placed into service. The
increase in allocations was due to higher allocated costs from the increased headcount. Cost of product revenue was $0.4 million
from sales of Prosigna in 2019, a product that we acquired from NanoString in December 2019.

Comparison of cost of testing revenue for the years ending December 31, 2018 and 2017 are included in Item 8 of Part II of
the Annual Report on Form 10-K filed with the Securities and Exchange Commission dated February 25, 2019. There was no
cost of product revenue in 2017.

67

Research and development

Comparison of the years ended December 31, 2019 and 2018 was as follows (in thousands of dollars, except percentages):

Research and development expense

Compensation expense

Direct research and development expense

Professional fees

Depreciation and amortization

Other expenses

Allocations

Total

Year Ended December 31,

2019

Change

%

2018

$

9,444

$

1,209

15 % $

8,235

2,924

548

287

443

1,205

$

14,851

$

(792)

(242)

(113)

38

(69)

31

(21)%
(31)%
(28)%
9 %
(5)%
— % $

3,716

790

400

405

1,274

14,820

Research and development expense was flat in the year ended December 31, 2019 compared to 2018. Compensation expense
increased $1.2 million, primarily due to higher stock-based compensation expense from the increase in our stock price and incentive
compensation, partially offset by severance costs incurred in 2018 that were not incurred in 2019. The decrease in direct research
and development expense was due to one-time sequencing costs and materials and supplies purchased for research and development
projects in 2018. The decrease in professional fees was due to lower consulting costs.

Comparison of research and development expense for the years ending December 31, 2018 and 2017 are included in Item 8

of Part II of the Annual Report on Form 10-K filed with the Securities and Exchange Commission dated February 25, 2019.

Selling and marketing

Comparison of the years ended December 31, 2019 and 2018 was as follows (in thousands of dollars, except percentages):

Selling and marketing expense:

Compensation expense

Direct marketing expense

Professional fees

Other expenses

Allocations

Total

Year Ended December 31,

2019

Change

%

2018

$

33,239

$

6,015

2,234

9,008

3,195

7,346

1,148

727

2,459

698

$

53,691

$

12,378

28% $
24%
48%
38%
28%
30% $

25,893

4,867

1,507

6,549

2,497

41,313

Selling and marketing expense increased $12.4 million, or 30%, for the year ended December 31, 2019 compared to 2018.
The increase in compensation expense was due to a 41% increase in average headcount, higher incentive compensation and higher
stock-based compensation expense. The increase in direct marketing expense was due to higher general marketing expenditures.
The increase in professional fees was due to higher consulting expenses. The increase in other expenses was primarily due to
higher travel and entertainment expenses related to the increase in headcount, which also increased allocated costs.

Comparison of selling and marketing expense for the years ending December 31, 2018 and 2017 are included in Item 8 of

Part II of the Annual Report on Form 10-K filed with the Securities and Exchange Commission dated February 25, 2019.

General and administrative

68

Comparison of the years ended December 31, 2019 and 2018 was as follows (in thousands of dollars, except percentages):

General and administrative expense:

Compensation expense

Professional fees

Occupancy costs

Depreciation and amortization

Other expenses

Allocations

Total

Year Ended December 31,

2019

Change

%

2018

$

18,537

$

8,854

2,518

1,408

4,430

(6,718)

2,479

2,652

143

(245)

987

(950)

$

29,029

$

5,066

15 % $
43 %
6 %
(15)%
29 %
16 %
21 % $

16,058

6,202

2,375

1,653

3,443

(5,768)

23,963

General and administrative expense increased $5.1 million, or 21%, for the year ended December 31, 2019 compared to
2018. The increase in compensation expense was primarily due to higher stock-based compensation expense from the increase
in our stock price. The increase in professional fees was mainly due to $1.5 million of expenses associated with our acquisition
of NanoString Technologies. Inc.'s diagnostics business, $0.6 million in other increases in legal spend, and $0.3 million higher
investor relations costs. The increase in other expenses was mainly from higher IT expenses to support the higher company
headcount. The increase in expenses allocated to other departments was due to higher headcount in departments associated with
selling and marketing and cost of revenue.

Comparison of general and administrative expense for the years ending December 31, 2018 and 2017 are included in Item

8 of Part II of the Annual Report on Form 10-K filed with the Securities and Exchange Commission dated February 25, 2019.

Interest expense

Interest expense decreased $1.3 million, or 66%, for the year ended December 31, 2019 compared to 2018, primarily due to
the prepayments of $12.5 million and $12.4 million of the principal amount of our Term Loan Advance in January 2019 and May
2019, respectively. The average Term Loan Advance interest rate was 6.70% and 6.14% for the years ended December 31, 2019
and 2018, respectively.

Comparison of interest expense for the years ending December 31, 2018 and 2017 are included in Item 8 of Part II of the

Annual Report on Form 10-K filed with the Securities and Exchange Commission dated February 25, 2019.

Other income, net

Other income, net, increased $2.0 million for the year ended December 31, 2019 compared to 2018, primarily due to higher
interest income from our cash and cash equivalents, which had higher balances in 2019 following our public offering of common
stock in July 2018 and May 2019.

Comparison of Other income, net, for the years ending December 31, 2018 and 2017 are included in Item 8 of Part II of the

Annual Report on Form 10-K filed with the Securities and Exchange Commission dated February 25, 2019.

Liquidity and Capital Resources

From inception through December 31, 2019, we have been financed primarily through net proceeds from the sale of our
equity securities and borrowings under our credit facilities. We have incurred net losses since our inception. For the years ended
December 31, 2019, 2018 and 2017, we had net losses of $12.6 million, $23.0 million and $31.0 million, respectively, and we
expect to incur additional losses in 2020 and potentially in future years. As of December 31, 2019, we had an accumulated deficit
of $246.7 million.

69

We believe our existing cash and cash equivalents of $159.3 million as of December 31, 2019, our available revolving line
of credit, and our revenue during the next 12 months will be sufficient to meet our anticipated cash requirements for at least the
next 12 months. We expect that our near- and longer-term liquidity requirements will continue to consist of costs to run our
laboratories, research and development expenses, selling and marketing expenses, general and administrative expenses, working
capital, costs to service our Loan and Security Agreement (See Note 8 to our audited consolidated financial statements included
in this Annual Report on Form 10-K for more information about our Loan and Security Agreement), capital expenditures and
general corporate expenses associated with the growth of our business. However, we may also use cash to acquire or invest in
complementary businesses, technologies, services or products that would change our cash requirements. If we are not able to secure
additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development
programs or selling and marketing initiatives, or forgo potential acquisitions or investments.

Public Offering of Common Stock

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

In July 30, 2018, we issued and sold 5,750,000 shares of common stock in a registered public offering, including 750,000
shares issued and sold upon the underwriters’ exercise in full of their option to purchase additional shares, at a price to the public
of $10.25 per share. Our net proceeds from the offering were approximately $55.0 million, after deducting underwriting discounts
and commissions and estimated offering expenses of $3.9 million.

Loan and Security Agreement

On November 3, 2017, we entered into the Loan and Security Agreement with Silicon Valley Bank. The Loan and Security
Agreement allows us to borrow up to $35.0 million, with a $25.0 million term loan, or Term Loan, and a revolving line of credit
of up to $10.0 million, or the Revolving Line of Credit, subject to, with respect to the Revolving Line of Credit, a borrowing base
of 85% of eligible accounts receivable. The Term Loan was advanced upon the closing of the Loan and Security Agreement.
Borrowings under the Loan and Security Agreement mature in October 2022. The Term Loan bears interest at a variable rate equal
to (i) the thirty-day U.S. London Interbank Offer Rate, or LIBOR, plus (ii) 4.20%, with a minimum rate of 5.43% per annum.
Principal amounts outstanding under the Revolving Line of Credit bear interest at a variable rate equal to (i) LIBOR plus (ii)
3.50%, with a minimum rate of 4.70% per annum. We are also required to pay an annual facility fee on the Revolving Line of
Credit of $25,000. The average Term Loan Advance interest rate for the year ended December 31, 2019 was 6.70%.

We may prepay the outstanding principal amount under the Term Loan plus accrued and unpaid interest and, if the Term
Loan is repaid in full, a prepayment premium. The prepayment premium will equal (i) $750,000, if the prepayment is made on
or before November 3, 2018, (ii) $500,000, if the prepayment is made after November 3, 2018 and on or prior to November 3,
2019 and (iii) $250,000, if the prepayment is made after November 3, 2019. In addition, a final payment on the Term Loan in the
amount of $1.2 million is due upon the earlier of the maturity date of the Term Loan or its payment in full. In January 2019 and
May 2019, we prepaid $12.5 million and $12.4 million of the principal amount of the Term Loan Advance, respectively, and did
not incur any prepayment premium as we did not repay the Term Loan Advance in full. These prepayments cover scheduled
principal payments from November 2019 to September 2022.

The Loan and Security Agreement contains customary representations, warranties, and events of default such as a material
adverse change in our business, operations or financial conditions, as well as affirmative and negative covenants. The negative
covenants include, among other provisions, covenants that limit or restrict our ability to incur liens, make investments, incur
indebtedness, merge with or acquire other entities, dispose of assets, make dividends or other distributions to holders of our equity
interests, engage in any new line of business, or enter into certain transactions with affiliates, in each case subject to certain
exceptions. As of December 31, 2019, the principal balance outstanding was $0.1 million and we were in compliance with debt
covenants.

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

70

Our obligations under the Loan and Security Agreement are secured by substantially all of our assets (excluding intellectual

property), subject to certain customary exceptions.

Cash Flows

The following table summarizes our cash flows for the years ended December 31, 2019, 2018 and 2017 (in thousands of

dollars):

Cash used in operating activities

Cash used in investing activities

Cash provided by (used in) financing activities

Cash Flows from Operating Activities

Years Ended December 31,

2019

$

(3,232) $

2018
(13,521) $

2017
(23,915)

(42,733)

127,287

(1,874)

59,499

(1,315)

(218)

Cash used in operating activities for the year ended December 31, 2019 was $3.2 million. The net loss of $12.6 million
includes non-cash charges of $9.8 million of stock-based compensation expense and $4.1 million of depreciation and amortization,
which includes $1.4 million of intangible asset amortization, and $0.2 million of end-of-term debt obligation accruals. Cash used
as a result of changes in operating assets and liabilities was $4.8 million, primarily comprised of an increase in accounts receivable
of $6.2 million, increase in supplies of $3.4 million and increase in other assets of $0.4 million, partially offset by an increase in
accrued liabilities and deferred rent of $5.2 million.

Cash used in operating activities for the year ended December 31, 2018 was $13.5 million. The net loss of $23.0 million
includes non-cash charges of $6.0 million of stock-based compensation expense and $3.9 million of depreciation and amortization,
which includes $1.1 million of intangible asset amortization. It also includes $0.3 million of end-of-term debt obligation accruals.
Cash used as a result of changes in operating assets and liabilities of $0.7 million was primarily due to a decrease in accounts
payable of $1.6 million, an increase in other assets of $0.8 million and increases in prepaid expenses and other current assets and
accounts receivable of $0.9 million, partially offset by a decrease in supplies of $1.9 million and an increase in accrued liabilities
and deferred rent of $0.7 million.

Cash used in operating activities for the year ended December 31, 2017 was $23.9 million. The net loss of $31.0 million
includes non-cash charges of $6.6 million of stock-based compensation expense and $3.8 million of depreciation and amortization,
which includes $1.1 million of intangible asset amortization. It also includes a $1.5 million prepayment penalty for exiting our
previous credit agreement which is a financing cash flow, and the amortization and write-off of $0.5 million of debt issuance costs.
Cash used as a result of changes in operating assets and liabilities of $5.4 million was primarily due to an increase in accounts
receivable of $4.0 million, an increase in supplies inventory of $1.8 million and a decrease in accrued liabilities and deferred rent
of $1.2 million, partially offset by an increase in accounts payable of $1.7 million.

Cash Flows from Investing Activities

Cash used in investing activities for the year ended December 31, 2019 was $42.7 million, consisting of $40.0 million for
the acquisition of NanoString Technologies, Inc.'s diagnostics business, and $2.7 million for the acquisition of property and
equipment, net of proceeds from the disposal of property and equipment.

Cash used in investing activities for the year ended December 31, 2018 was $1.9 million for the acquisition of property and

equipment.

Cash used in investing activities for the year ended December 31, 2017 was $1.2 million, mainly comprising $1.8 million
for the acquisition of property and equipment, partially offset by $0.4 million of proceeds from the sale of property and equipment.

Cash Flows from Financing Activities

71

Cash provided by financing activities for the year ended December 31, 2019 was $127.3 million, consisting of $137.8 million
in net proceeds from the issuance of common stock in a public offering in May 2019 and $14.6 million in proceeds from the
exercise of options to purchase our common stock and purchase of stock under our Employee Stock Purchase Plan, or ESPP, during
the year, partially offset by $24.9 million of loan principal repayments and finance lease payments of $0.3 million.

Cash provided by financing activities for the year ended December 31, 2018 was $59.5 million, consisting of $55.0 million
in net proceeds from the issuance of common stock in a public offering in the second quarter of 2018, $4.4 million in proceeds
from the exercise of options to purchase our common stock and purchases under our ESPP and $0.4 million in proceeds from a
legal settlement, partially offset by capital lease payments of $0.3 million during the period.

Cash used in financing activities for the year ended December 31, 2017 was $0.2 million, consisting of a $25.4 million
payment of the principal on prior credit agreement, $1.5 million payment for the prepayment premium for terminating the prior
credit agreement and $0.3 million of capital lease payments, partially offset by $24.9 million of net proceeds from our new loan
and security agreement, $1.9 million in proceeds from the purchase of stock under our ESPP and exercise of options to purchase
our common stock.

Contractual Obligations

The following table summarizes certain contractual obligations as of December 31, 2019 (in thousands of dollars):

Operating lease obligations (1)

Long-term debt obligations (2)

Supplies purchase commitments

Capital lease obligation

Total

Payments Due by Period

Fiscal Year
2020

$

2,332

Fiscal Year
2021 to 2022
4,873
$

Fiscal Year
2023 to 2024
5,157
$

Fiscal Year
2025 and
Beyond

Total

$

4,161

$

16,523

—

5,693

—

1,288

1,913

—

—

—

—

—

—

—

1,288

7,606

—

$

8,025

$

8,074

$

5,157

$

4,161

$

25,417

(1) Represents minimum operating lease payments under operating leases for facilities.
(2) Debt obligations include principal, estimate of variable rate interest and end-of-term debt obligation. In January 2019 and
May 2019, we paid off $12.5 million and $12.4 million of principal from our Loan and Security Agreement, respectively.

Off-balance Sheet Arrangements

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

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842). This ASU is aimed at making leasing activities
more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-
of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The ASU was effective
for interim and annual periods beginning after December 15, 2018. Additionally, the FASB issued ASU No. 2018-11, Leases
(Topic 842): Targeted Improvements, which offers an additional transition method whereby entities may apply the new leases
standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings rather than
application of the new leases standard at the beginning of the earliest period presented in the financial statements. We elected this
transition method and adopted ASC 842 on January 1, 2019 and as a result, recorded operating lease right-of-use ("ROU") assets
of $9.8 million, including offsetting deferred rent of $4.3 million, along with the associated operating lease liabilities of $14.1
million. On January 1, 2019, we had finance lease ROU assets of $0.8 million and associated finance lease liabilities of $0.3
million for leases classified as finance leases prior to the adoption of ASC 842. The adoption of ASC 842 had an immaterial impact
on the our consolidated statement of operations and comprehensive loss, consolidated statement of stockholders' equity and
consolidated statement of cash flows for the year ended December 31, 2019. In addition, we elected the package of practical
expedients permitted under the transition guidance within the new standard which allowed it to carry forward the historical lease

72

classification. Additional information and disclosures required by this new standard are contained in Note 7, Commitments and
Contingencies.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses
on Financial Instruments. This ASU requires measurement and recognition of expected credit losses for financial assets. This
guidance will become effective for us beginning January 1, 2020 with early adoption permitted. We are currently evaluating the
potential effect of this standard on its financial statements. We do not expect to have a material impact on our financial statements
and related disclosures from the adoption of this guidance.

In November 2018,

the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808). Under this
ASU, transactions in collaborative arrangements are to be accounted for under ASC 606 if the counterparty is a customer for a
good or service (or bundle of goods and services) that is a distinct unit of account. Also, entities are precluded from presenting
consideration from transactions with a counterparty that is not a customer together with revenue recognized from ASC 606. This
ASU is effective for all interim and annual reporting periods beginning on or after December 15, 2019, with early adoption
permitted. We adopted the ASU in 2019 with no cumulative-effect adjustments or retrospective impact.

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 $159.3 million as of December 31, 2019 which consisted of bank deposits, money market funds and
overnight reverse repurchase agreements. 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 consolidated financial
statements.

73

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Veracyte, Inc.
Index to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

Consolidated Balance Sheets as of December 31, 2019 and 2018

Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2019, 2018
and 2017

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2019, 2018 and 2017

Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017

Notes to Consolidated Financial Statements

Page No.

75

78

79

80

81

83

74

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Veracyte, Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Veracyte, Inc. (the Company) as of December 31, 2019 and
2018, the related consolidated statements of operations and comprehensive loss, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
Framework), and our report dated February 25, 2020 expressed an unqualified opinion thereon.

Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a
whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters
or on the accounts or disclosures to which they relate.

75

Description of
the Matter

How We
Addressed the
Matter in Our
Audit

Revenue from diagnostic services
During the year ended December 31, 2019, the Company’s revenue from diagnostic
services was approximately $107.4 million. As discussed in Note 2, the Company’s
diagnostic services revenue is recognized upon the delivery of test results to the
prescribing physician, at which time the Company bills for its services. The Company
recognizes revenue related to billings based on estimates of the amount that will
ultimately be realized.

Auditing the measurement of the Company’s diagnostic services revenue was complex
due to the judgments used in estimating the amount to be realized per test. In determining
the amount to recognize for a delivered test the Company considers factors such as
payment history, amount collected per test, payer coverage, and whether there is a
reimbursement contract between the payer and the Company. The Company also
considers whether historical collections per test are indicative of future collections or if
there are any current or expected developments or changes that could affect
reimbursement rates, which is an estimate that requires significant judgment by the
Company.
We obtained an understanding, evaluated the design, and tested the operating
effectiveness of controls used by management in making this estimate. For example, we
tested controls over management’s review of changes in collection trends, payer rates,
contract terms, and payer behavior and expectations of how those changes are expected
to impact future collections and the amount of revenue to be recognized per test.

To test management’s estimate of the amount of revenue to be recognized per test
delivered our audit procedures included, among others, evaluating the methodology used,
understanding and testing the significant assumptions discussed above, and testing the
underlying data used by the Company (including the completeness and accuracy of
historical data). We tested payment history and amount collected per test on a sample
basis, including agreeing selections to supporting documentation such as physician
requisition, cash collected, write-offs of receivables, and proof of delivery, as applicable.
We evaluated and tested management’s assessment of changes in payer trends, behaviors,
and contract terms and how those changes will impact future cash collections as well as
management’s consideration of any contrary factors. We also assessed and tested
management’s review of differences between prior period accrual rates and actual cash
collections and how those differences were factored into management’s estimate of
current period accrual rates.

76

Description of
the Matter

Valuation of intangible assets and contingent consideration
On December 3, 2019, the Company entered into an agreement to acquire a license and
certain assets for consideration of $60 million, including up to $10 million of contingent
consideration upon achievement of certain milestones. As discussed in Note 4 to the
consolidated financial statements, the Company accounted for this transaction as a
business combination.

Auditing the accounting for this business combination was complex due to the significant
estimation uncertainty in determining the fair value of identified intangible assets and
contingent consideration. The significant estimation uncertainty was primarily due to
the sensitivity of the fair value estimates to the significant underlying assumptions about
the forecasted results of the acquired business. The significant assumptions used to form
the basis of the forecasted results included revenue growth rates, profit margins, timing
of cash flows, and the discount rate. These significant assumptions are forward-looking
and could be affected by future economic and market conditions.

How We
Addressed the
Matter in Our
Audit

We obtained an understanding, evaluated the design, and tested the operating
effectiveness of the Company’s controls over the valuation of intangible assets and
contingent consideration related to the business combination. This included testing
controls over the estimation process supporting the recognition and measurement of
identified intangible assets and contingent consideration and management’s judgment
and evaluation of underlying assumptions and estimates with regards to these fair values.

To test these fair values, our audit procedures included, among others, involvement of
a specialist to assist us in the evaluation of the Company’s valuation methodology and
testing of the discount rate, evaluating prospective financial information, and testing the
completeness and accuracy of underlying data. For example, we compared the significant
assumptions to current industry and market trends, historical results and other relevant
factors.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2014.
Redwood City, California
February 25, 2020

77

VERACYTE, INC.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

Assets
Current assets:

Cash and cash equivalents

Accounts receivable

Supplies

Prepaid expenses and other current assets

Total current assets

Property and equipment, net

Right-of-use assets - operating lease

Finite-lived intangible assets, net

Goodwill

Restricted cash

Other assets

Total assets

Liabilities and Stockholders' Equity
Current liabilities:

Accounts payable

Accrued liabilities

Current portion of long-term debt

Current portion of operating lease liability

Total current liabilities

Long-term debt

Deferred rent, net of current portion

Acquisition related contingent consideration

Operating lease liability, net of current portion

Total liabilities

Commitments and contingencies

Stockholders' equity:

Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and

outstanding as of December 31, 2019 and 2018

Common stock, $0.001 par value; 125,000,000 shares authorized, 49,625,341 and
40,863,202 shares issued and outstanding as of December 31, 2019 and 2018,
respectively

Additional paid-in capital

Accumulated deficit

Total stockholders' equity

Total liabilities and stockholders' equity

As of December 31,

2019

2018

$

159,317

$

19,329

6,806

2,235

187,687

8,933

8,808

65,019

2,725

603

1,437

77,995

13,168

3,402

2,387

96,952

8,940

—

12,000

1,057

603

1,086

$

$

275,212

$

120,638

2,328

$

13,734

—

1,407

17,469

694

—

6,088

11,506

35,757

—

50

2,516

9,186

1,357

—

13,059

23,925

3,899

—

—

40,883

—

41

486,090

(246,685)

239,455

313,800

(234,086)

79,755

$

275,212

$

120,638

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

78

VERACYTE, INC.

Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

Revenue:

Testing revenue

Product revenue

Biopharmaceutical revenue

Collaboration revenue

Total revenue

Operating Expenses:

Cost of testing revenue

Cost of product revenue

Research and development

Selling and marketing

General and administrative

Intangible asset amortization

Total operating expenses

Loss from operations

Interest expense

Other income, net

Year Ended December 31,

2019

2018

2017

$

107,355

$

91,058

$

71,953

923

8,090

4,000

—

950

—

—

—

—

120,368

92,008

71,953

36,077

446

14,851

53,691

29,029

1,401

135,495

(15,127)

(677)

3,205

33,078

—

14,820

41,313

23,963

1,067

114,241

(22,233)

(1,963)

1,197

28,195

—

13,881

32,260

23,088

1,067

98,491

(26,538)

(4,941)

476

Net loss and comprehensive loss

Net loss per common share, basic and diluted

$

$

(12,599) $

(22,999) $

(31,003)

(0.27) $

(0.62) $

(0.91)

Shares used to compute net loss per common share, basic and diluted

46,138,177

37,020,246

33,925,617

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

79

VERACYTE, INC.

Consolidated Statements of Stockholders' Equity

(in thousands, except shares)

Balance at December 31, 2016

33,762,278

$

34

$

239,631

$

(180,084) $

59,581

Common Stock

Shares

Amount

Additional
Paid-in
Capital

Accumulated
Deficit

Total
Stockholders'
Equity

Issuance of common stock on exercise of stock options and vesting of

restricted stock units

Issuance of common stock under employee stock purchase plan (ESPP)

Stock-based compensation expense (employee)

Stock-based compensation expense (non-employee)

Stock-based compensation expense (ESPP)

Net loss and comprehensive loss

Balance at December 31, 2017

Issuance of common stock on exercise of stock options and vesting of

restricted stock units

Issuance of common stock under employee stock purchase plan (ESPP)

295,059

153,051

—

—

—

—

34,210,388

756,231

146,583

Sale of common stock in a public offering, net of issuance costs of $3,890

5,750,000

Stock-based compensation expense (employee)

Stock-based compensation expense (non-employee)

Stock-based compensation expense (ESPP)

Legal settlement from short-swing profits, net of tax

Net loss and comprehensive loss

Balance at December 31, 2018

Issuance of common stock on exercise of stock options and vesting of

restricted stock units

Issuance of common stock under employee stock purchase plan (ESPP)

—

—

—

—

—

40,863,202

1,924,156

136,251

Sale of common stock in a public offering, net of issuance costs of $9,208

6,325,000

Issuance of common stock for acquisition

Stock-based compensation expense (employee)

Stock-based compensation expense (non-employee)

Stock-based compensation expense (ESPP)

Net loss and comprehensive loss

Balance at December 31, 2019

376,732

—

—

—

—

49,625,341

$

—

—

—

—

—

—

34

1

—

6

—

—

—

—

—

41

2

—

6

1

—

—

—

—

50

1,374

656

6,352

19

246

—

248,278

3,432

790

55,032

5,602

24

332

310

—

313,800

13,376

1,266

137,842

9,999

8,883

181

743

—

—

—

—

—

—

(31,003)

(211,087)

—

—

—

—

—

—

—

(22,999)

(234,086)

—

—

—

—

—

—

—

1,374

656

6,352

19

246

(31,003)

37,225

3,433

790

55,038

5,602

24

332

310

(22,999)

79,755

13,378

1,266

137,848

10,000

8,883

181

743

(12,599)

(12,599)

$

486,090

$

(246,685) $

239,455

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

80

VERACYTE, INC.

Consolidated Statements of Cash Flows

(in thousands of dollars)

Operating activities

Net loss

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

(Gain) loss on disposal of property and equipment

Stock-based compensation

Other income

Amortization and write-off of debt discount and issuance costs

Interest on end-of-term debt obligation and prepayment penalty

Changes in operating assets and liabilities:

Accounts receivable

Supplies
Prepaid expenses and other current assets

Right-of-use assets - operating lease and operating lease liability

Other assets

Accounts payable

Accrued liabilities and deferred rent

Net cash used in operating activities
Investing activities

Cash paid for acquisition

Purchases of property and equipment

Proceeds from the sale of property and equipment

Net cash used in investing activities
Financing activities

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

Proceeds from issuance of common stock in a public offering, net of issuance costs

Payment of long-term debt

Payment of end-of-term debt obligation and prepayment penalty

Proceeds from legal settlement regarding short-swing profits

Payment of financial lease liability

Proceeds from the exercise of common stock options and employee stock purchases

Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash at beginning of year

Cash, cash equivalents and restricted cash at end of year

Supplementary cash flow information of non-cash investing and financing activities:

Operating lease liability arising from obtaining right-of-use assets - operating lease at
beginning of period

Shares issued for purchase consideration for a business combination

Deferred purchase consideration for a business combination

Purchases of property and equipment included in accounts payable and accrued liabilities
Supplementary cash flow information:

Cash paid for interest on debt
Cash paid for tax

Year Ended December 31,

2019

2018

2017

$

(12,599) $

(22,999) $

(31,003)

4,117

(23)

9,807

—

83

229

(6,161)

(3,404)
154

(171)

(351)

(141)

5,228

(3,232)

(40,000)

(2,756)

23

(42,733)

—

137,848

(24,900)

—

—

(308)

14,647

127,287

81,322

78,598

3,920

—

5,958

(93)

32

312

(452)

1,922
(517)

—

(760)

(1,568)

724

(13,521)

—

(1,874)

—

(1,874)

—

55,038

—

—

403

(292)

4,350

59,499

44,104

34,494

$

$

159,920

$

78,598

$

14,118

$

— $

10,000

6,088

226

332
35

—

—

273

1,547
79

3,841

12

6,617

—

472

1,589

(3,960)

(1,849)
(7)

—

(192)

1,728

(1,163)

(23,915)

—

(1,755)

440

(1,315)

24,880

200

(25,385)

(1,536)

—

(274)

1,897

(218)

(25,448)

59,942

34,494

—

—

—

42

2,718
21

81

Cash, Cash Equivalents and Restricted Cash:

Cash and cash equivalents

Restricted cash

Total cash, cash equivalents and restricted cash

December 31,

2019

2018

2017

$

$

159,317

603

159,920

$

$

77,995

603

78,598

$

$

33,891

603

34,494

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

82

VERACYTE, INC.

Notes to Consolidated Financial Statements

1. Organization and Description of Business

Veracyte, Inc. (“Veracyte” or the “Company”) is a leading genomic diagnostics company that is creating value through
innovation. The Company was founded in 2008 with a mission to improve diagnostic accuracy. Today, the Company's growing
menu of tests leverage advances in genomic science and technology to improve care throughout the patient journey, enabling more
confident diagnostic, prognostic and treatment decisions in cancer and other challenging diseases. The Company is creating new
standards of care by enabling more patients to avoid risks of unnecessary invasive procedures and removing costs from the healthcare
system, while speeding the time to diagnosis and treatment decisions.

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

The Company performs its genomic tests for thyroid cancer, lung cancer and idiopathic pulmonary fibrosis, or IPF, in our
CLIA-certified laboratory in South San Francisco, California. In December 2019, we announced our acquisition of the exclusive
global diagnostics license to the NanoString nCounter FLEX Analysis System, as well as the Prosigna breast cancer prognostic
gene signature assay, which is commercially available, and the LymphMark lymphoma subtyping assay, which is in development.
Both tests are designed for use on the nCounter system.

The Company offers genomic tests in thyroid cancer; lung cancer; IPF and breast cancer:

Afirma Genomic Sequencing Classifier and Xpression Atlas. The Company's Afirma offerings include the Afirma
GSC and XpressionAtlas, to help guide next steps for patients with potentially cancerous thyroid nodules. The offerings
are intended to provide physicians with clinically actionable results from a single fine needle aspiration, or FNA biopsy.
The Afirma GSC was developed with RNA whole-transcriptome sequencing and machine learning, and is used to
identify patients with benign thyroid nodules among those with indeterminate cytopathology results in order to rule
out unnecessary thyroid surgery.

The Company commercially launched the Afirma Xpression Atlas in 2018 to complement the Afirma GSC. The
Xpression Atlas provides physicians with genomic alteration content from the same FNA samples that are used in
Afirma GSC testing and may help physicians decide with greater confidence on the surgical or therapeutic pathway
for their patients.

Percepta Genomic Sequencing Classifier. The Percepta classifier improves lung cancer diagnosis by enhancing the
performance of diagnostic bronchoscopies, thus identifying more patients with lung nodules who are at low risk of
cancer and may avoid further, invasive procedures. This second-generation test was developed on our RNA whole-
transcriptome sequencing platform and commercially introduced in June 2019, provides expanded clinical utility by
also identifying patients as high risk of cancer so they may obtain faster diagnosis and treatment. The test is built upon
foundational "field of injury" science - through which genomic changes associated with lung cancer in current and
former smokers can be identified with a simple brushing of a person's airway - without the need to sample the often
hard-to-reach nodule directly.

Envisia Genomic Classifier. The Envisia classifier improves diagnosis of IPF by helping physicians better differentiate
IPF from other interstitial lung diseases, or ILDs, without the need for surgery. The test identifies the genomic pattern
of usual interstitial pneumonia, or UIP, a hallmark of IPF, with high accuracy on patient samples that are obtained
through transbronchial biopsy, a nonsurgical procedure that is commonly used in lung evaluation.

Prosigna Breast Cancer Prognostic Gene Signature Assay. The Prosigna test, acquired in December 2019 through
our strategic transaction with NanoString, uses advanced genomic technology to inform next steps for patients with
early-stage breast cancer, based on the genomic make-up of their disease. The test leverages a collection of 50 genes
known as the PAM50 gene signature and can provide a breast cancer patient and physician with prognostic score that
indicates the probability of cancer recurrence over ten years. Physicians use Prosigna to help guide therapeutic decisions
so that patients receive a therapeutic intervention, such as chemotherapy, only if clinically warranted.

83

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

The Company’s approach also provides multiple opportunities for partnerships with biopharmaceutical companies. In
developing the Company's products, the Company has built or gained access to unique biorepositories, proprietary technology and
bioinformatics that it believes are important to the development of new targeted therapies, determining clinical trial eligibility and
guiding treatment selection.

All of the Company's testing services are made available through its clinical reference laboratories located in South San

Francisco, California and Austin, Texas.

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company's consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States ("U.S. GAAP"). The consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, which was created in 2019 to process certain administrative functions associated with the business
combination in Note 4, Business Combination. All intercompany accounts and transactions have been eliminated in consolidation.
Certain amounts have been reclassified on the consolidated statements of operations for presentation purposes.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant items
subject to such estimates include: revenue recognition; the useful lives of property and equipment; the recoverability of long-lived
assets; the estimation of the fair value of intangible assets; stock options; income tax uncertainties, including a valuation allowance
for deferred tax assets; and contingencies. The Company bases these estimates on historical and anticipated results, trends, and
various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future
events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recognized
revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and
assumptions.

Liquidity

The Company has incurred net losses since its inception and as of December 31, 2019, the Company had an accumulated
deficit of $246.7 million. The Company believes its cash and cash equivalents of $159.3 million as of December 31, 2019 and its
revenue from sales in 2020 will be sufficient to meet its anticipated cash requirements through at least February 2021.

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

In July 2018, the Company issued and sold 5,750,000 shares of common stock in a registered public offering, including
750,000 shares issued and sold upon the underwriters' exercise in full of their option to purchase additional shares, at a price to
the public of $10.25 per share. The Company's net proceeds from the offering were approximately $55.0 million, after deducting
underwriting commissions and offering expenses of $3.9 million.

In November 2017, the Company entered into a Loan and Security Agreement and drew down a term loan advance of $25.0
million of which the entire amount was used to pay the outstanding balance of the Company's previous long-term debt as discussed
in Note 8 - Debt.

84

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

If the Company is not able to generate cash proceeds from revenue sufficient to satisfy its cash obligations, the Company
will need to finance future cash needs primarily through public or private equity offerings, debt financings, borrowings or strategic
collaborations or licensing arrangements. If the Company is not able to secure additional funding 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 and
marketing initiatives which may have a material adverse effect on the Company's business, results of operations, financial condition
and/or its ability to fund its scheduled obligations on a timely basis or at all.

Concentrations of Credit Risk and Other Risks and Uncertainties

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

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

The Company is also subject to credit risk from its accounts receivable related to its sales. The Company does not perform

evaluations of customers' financial condition and does not require collateral.

Through December 31, 2019, most of the Company's revenue have been derived from the sale of Afirma. To date, Afirma
has been delivered primarily to physicians in the United States. The Company's third-party payers and other customers in excess
of 10% of revenue and their related revenue as a percentage of total revenue were as follows:

Medicare
UnitedHealthcare

Year Ended December 31,

2019

2018

2017

26%
11%
37%

29%
12%
41%

26%
14%
40%

The Company's significant third-party payers and other customers in excess of 10% of accounts receivable and their related

accounts receivable balance as a percentage of total accounts receivable were as follows:

Medicare
Johnson and Johnson Services, Inc.
UnitedHealthcare

Cash Equivalents

As of December 31,

2019

2018

15%
10%
9%

20%
—%
11%

Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the
date of purchase. Cash equivalents consist of amounts invested in a money market account primarily consisting of U.S. Treasury
reserves, and overnight reverse repurchase agreements which are tri-party repurchase agreements and are collateralized by U.S.
Treasury and agency securities of at least 102% of the principal amount. In a tri-party repurchase agreement, a third-party custodian
bank functions as an independent intermediary to facilitate transfer of cash and holding the collateral on behalf of the underlying
investor for the term of the agreement thereby minimizing risk and exposure to both parties. These overnight reverse repurchase
agreements are included within cash equivalents due to their high liquidity and relatively low risk.

Restricted Cash

85

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

The Company had deposits of $603,000 included in long-term assets as of December 31, 2019 and December 31, 2018,
restricted from withdrawal and held by a bank in the form of collateral for an irrevocable standby letter of credit held as security
for the lease of the Company's South San Francisco facility.

Acquisitions

The Company first determines whether a set of assets acquired and liabilities assumed constitute a business and should be
accounted for as a business combination. If the assets acquired are not a business, the Company accounts for the transaction as an
asset acquisition. Business combinations are accounted for by using the acquisition method of accounting. Under the acquisition
method, assets acquired, and liabilities assumed are recorded at their respective fair values as of the acquisition date in our
consolidated financial statements. The excess of the fair value of consideration transferred over the fair value of the net assets
acquired is recorded as goodwill. Contingent consideration obligations incurred in connection with a business combination are
recorded at fair value on the acquisition date and remeasured at each subsequent reporting period until the related contingencies
are resolved, with the resulting changes in fair value recorded in earnings.

Accounts Receivable and Allowance for Doubtful Accounts for Product Sales

Accounts receivable are stated at the amount management expects to collect from customers based on their outstanding
invoices. Management reviews accounts receivable regularly to determine if any receivable will potentially be uncollectible and
to estimate the amount of allowance for doubtful accounts necessary to reduce accounts receivable to its estimated net realizable
value by analyzing the status of significant past due receivables. Product sales commenced in December 2019 and there was no
allowance for doubtful accounts at either December 31, 2019 or 2018.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, generally between three and five years. Leasehold
improvements are amortized using the straight-line method over the shorter of 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 are capitalized. When
assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any
resulting gain or loss is reflected in the statements of operations and comprehensive loss in the period realized.

Finite-lived Intangible Assets

Finite-lived intangible assets consist of intangible assets acquired as part of business combinations. The Company amortizes
finite-lived intangible assets using the straight-line method over their estimated useful lives of 5 to 15 years, based on management's
estimate of the period over which their economic benefits will be realized, product life and patent life. The Company tests these
finite-lived intangible assets for impairment when events or circumstances indicate a reduction in the fair value below their carrying
amounts. There was no impairment for the years ended December 31, 2019, 2018 or 2017.

Goodwill

Goodwill, derived from the Company's acquisition of Allegro Diagnostics Corp. in September 2014 and the exclusive global
diagnostics license to the NanoString nCounter FLEX Analysis System and Prosigna and LymphMark assays in December 2019,
is reviewed for impairment on an annual basis or more frequently if events or circumstances indicate that it may be impaired. The
Company's goodwill evaluation is done annually on October 31 and is based on both qualitative and quantitative assessments
regarding the fair value of goodwill relative 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 and commercialization of 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 the recorded goodwill over its implied fair value. There was no impairment for the years ended December 31,
2019, 2018 or 2017.

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VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

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.

See Note 6, "Fair Value Measurements" for further information on the fair value of the Company’s financial instruments.

Revenue Recognition

Testing Revenue

The Company commenced recognizing testing revenue in accordance with the provisions ofASC 606, Revenue from Contracts
with Customers, or ASC 606, starting January 1, 2018. Prior to January 1, 2018, the Company recognized testing revenue in
accordance with the provisions of ASC 954-605, Health Care Entities - Revenue Recognition, or ASC 954.

Most of the Company’s revenue is generated from the provision of testing services. These services are completed upon the
delivery of test results to the prescribing physician, at which time the Company bills for the services. The Company recognizes
revenue related to billings based on estimates of the amount that will ultimately be realized. In determining the amount to accrue
for a delivered test, the Company considers factors such as payment history, payer coverage, whether there is a reimbursement
contract between the payer and the Company, payment as a percentage of agreed upon rate (if applicable), amount paid per test
and any current developments or changes that could impact reimbursement. These estimates require significant judgment by
management.

The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method, which requires a cumulative
catch-up adjustment as if the Company had recognized revenue under ASC 606 from January 1, 2016. Prior to January 1, 2018,
the Company recognized revenue in accordance with ASC 954 and recognized revenue for tests delivered on an accrual basis when
amounts that will ultimately be realized could be reasonably estimated, and on the cash basis when there was insufficient information
to estimate revenue accruals. There was sufficient payment history for the Company to substantially accrue all revenue upon
delivery of test results starting July 1, 2016 and the Company continued to recognize revenue in 2017 upon cash receipt for
unaccrued tests that were delivered prior to July 1, 2016.

Testing revenue recognized for the years ended December 31, 2019, 2018 and 2017 was as follows (in thousands of dollars):

Year Ended December 31,

2019

2018

2017

Testing revenue recognized on the accrual
basis
Testing revenue recognized on the cash basis

Total

$ 107,355

100% $

91,058

100% $

69,274

—

—%

—

—%

2,679

$ 107,355

100% $

91,058

100% $

71,953

96%

4%

100%

As noted above, on July 1, 2016 the Company began recognizing testing revenue from substantially all its tests on the accrual
basis of accounting at an amount equal to management’s best estimate of the cash to ultimately be collected. For tests delivered
prior to July 1, 2016, substantially all the related cash had been collected by December 31, 2017. Thus, at January 1, 2018, the
cumulative impact of adopting ASC 606 was not material and no adjustment was recorded. Since the Company commenced
recognizing revenue from substantially all of its tests on the accrual basis of accounting commencing on July 1, 2016, and continued
to do so after the adoption of ASC 606, the adoption of ASC 606 did not have a material impact on the Company's statement of
operations for the year ended December 31, 2019.

During 2019, the Company changed its testing revenue estimates due to actual and anticipated cash collections for tests
delivered in 2018 or prior years and recognized additional revenue of $1.6 million, which resulted in a decrease in the Company's
loss from operations of $1.6 million and a decrease in loss per share of $0.04 for the year ended December 31, 2019.

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VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

During 2018, the Company changed its testing revenue estimates due to actual and anticipated cash collections for tests
delivered in 2017 or prior years and recognized additional revenue of $1.4 million, which resulted in a decrease in the Company's
loss from operations of $1.4 million and a decrease in loss per share of $0.04 for the year ended December 31, 2018.

Product Revenue

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

Product revenue from instruments, consumables and in vitro diagnostic kits is recognized generally upon shipment or when
the instrument is ready for use by the end customer, which is when title of the product has been transferred to the customer. This
process involves identifying the contract with a customer, determining the performance obligations in the contract, determining
the contract price, allocating the contract price to the distinct performance obligations in the contract, and recognizing revenue
when the performance obligations have been satisfied. A performance obligation is considered distinct from other obligations in
a contract when it provides a benefit to the customer either on its own or together with other resources that are readily available
to the customer and is separately identified in the contract. Performance obligations are considered satisfied once the Company
has transferred control of a product to the customer, meaning the customer has the ability to use and obtain the benefit of the
product. The Company recognizes product revenue for satisfied performance obligations only when there are no uncertainties
regarding payment terms or transfer of control. Shipping and handling costs incurred for product shipments are charged to the
Company's customers and included in product revenue. Revenues are presented net of the taxes that are collected from customers
and remitted to governmental authorities. There was no revenue from instrument sales for the years ended December 31, 2019,
2018 or 2017.

Biopharmaceutical and Collaboration Revenue

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

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

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

Collaborative Arrangements

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

The terms of the Company’s collaborative arrangements typically include one or more of the following: (i) up-front fees;
(ii) milestone payments related to the achievement of development, regulatory, or commercial goals; and (iii) royalties on net sales

88

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

of licensed products. Each of these payments may result in collaboration revenues or an offset against research and development
expense.

Net sales of data or other services to our customers are classified under biopharmaceutical revenue and collaboration revenue,
such as milestones, are classified under collaboration revenue in our consolidated statements of operations and comprehensive
loss.

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

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

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

Services Agreement with Loxo Oncology

On April 9, 2018, the Company entered into an agreement with Loxo Oncology, Inc. ("Loxo") whereby the Company agreed
to provide certain tissue samples and other services in exchange for agreed-upon fees. During the quarter ended June 30, 2018,
the Company recognized $450,000 of revenue upon deliveries of tissue samples and the Company received $500,000 for other
services, which was recognized ratably during the quarters ended September 30 and December 31, 2018 as the services were
performed. Thereafter, the Company expects to receive approximately $250,000 per quarter as services are performed and may
also recognize revenue related to the deliveries of additional tissue samples as long as the agreement is not terminated. The
agreement has a one-year term with an automatic renewal of one year and Loxo may terminate the agreement at any time with at
least 90 days' notice. As of December 31, 2019, the agreement had not been terminated. The Company evaluated the accounting
for this agreement under ASC 606 and concluded that the performance obligations thereunder are the deliveries of tissue samples
and performance of services, both of which are distinct. For the year ended December 31, 2019, the Company recognized revenue
of $90,000 for deliveries of tissue samples and $1,000,000 for the performance of services and is classified under biopharmaceutical
revenue in the Consolidated Statement of Operations and Comprehensive Loss. There was no deferred revenue related to this
agreement at December 31, 2019.

Diagnostic Development Agreement with Johnson & Johnson

On December 28, 2018, the Company entered into a diagnostics development agreement with Johnson and Johnson Services,
Inc. ("JJSI") (i) to cooperate on a program to enable the Company to use JJSI samples and clinical data to develop a next generation

89

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

bronchial genomic classifier diagnostic for lung cancer diagnosis (“Percepta v.2") and a nasal genomic classifier diagnostic for
lung cancer (“NasaRISK”) and (ii) for JJSI to use Veracyte data generated in two Veracyte development programs for therapeutic
purposes and for purposes of developing a companion diagnostic product used in conjunction with a JJSI therapeutic. The Company
granted a license to JJSI with the right to use data and under the Company's intellectual property rights for JJSI's therapeutic
purposes, including the development and commercialization of a companion diagnostic for its products, from the Percepta v.2 and
NasaRISK programs. The license granted to JJSI is not distinct from other performance obligations as JJSI receives benefit only
when other performance obligations are met.

Under the terms of the agreement, the Company will provide data from its RNA whole-transcriptome sequencing platform
to JJSI in exchange for $7.0 million in payments from JJSI. The Company is also entitled to additional payments from JJSI of up
to $13.0 million, conditioned upon the achievement of certain milestones relating to the development and reimbursement of Percepta
v.2 and NasaRISK. For a period of ten years commencing with the first commercial sale of Percepta v.2 and NasaRISK, respectively,
the Company will make payments to JJSI of one percent of net cash collections for Percepta v.2 and in the low-single digits of net
cash collections for NasaRISK, depending on the number and timing of JJSI samples and associated clinical data the Company
receives from JJSI.

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

The Company recognized revenue of $7.0 million and $4.0 million during 2019 for the provision of data and fulfillment of
obligations relating to Percepta v.2 and NasaRISK development milestones, respectively. This revenue is classified under
biopharmaceutical revenue and collaboration revenue, respectively, in the consolidated statement of operations and comprehensive
loss. Accounts receivable from JJSI was $2.0 million at December 31, 2019. The cost of biopharmaceutical revenue recognized
under the agreement with JJSI is not significant and recorded in research and development in the statement of operations and
comprehensive loss. There was no deferred revenue related to this agreement at December 31, 2019.

Collaboration Agreement with AstraZeneca Group

On December 23, 2019, the Company entered into an agreement withAcerta Pharma B.V. ("Acerta"), a member ofAstraZeneca
Group whereby the Company agreed to provide genomic information that will support Acerta’s development of oncology
therapeutics. Acerta will reimburse the Company for certain development costs and pay milestones to the Company for the
achievement of development milestones. As of December 31, 2019, there was no performance of obligations under the agreement
or consideration paid. The agreement will be accounted for in accordance with the policy on collaborative arrangements, as
mentioned in this footnote.

Cost of Testing Revenue

The components of our cost of testing services are laboratory expenses, sample collection expenses, compensation expense,
license fees and royalties, depreciation and amortization, other expenses such as equipment and laboratory supplies, and allocations
of facility and information technology expenses. Costs associated with performing tests are expensed as the test is processed
regardless of whether and when revenue is recognized with respect to that test.

Cost of Product Revenue

Cost of product revenue consists primarily of costs of purchasing instruments and consumables from third-party contract
manufacturers, installation, warranty, service and packaging and delivery costs. In addition, cost of product includes royalty costs
for licensed technologies included in the Company’s products and labor expenses. Cost of product revenue for instruments and

90

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

consumables is recognized in the period the related revenue is recognized. Shipping and handling costs incurred for product
shipments are included in cost of product in the consolidated statements of operations.

Research and Development

Research and development expenses include expenses incurred to develop our technology, collect clinical samples and
conduct clinical studies to develop and support our products. These expenses consist of compensation expenses, direct research
and development expenses such as prototype materials, laboratory supplies and costs associated with setting up and conducting
clinical studies at domestic and international sites, professional fees, depreciation and amortization, other miscellaneous expenses
and allocation of facility and information technology expenses. We expense all research and development costs in the periods in
which they are incurred.

Income Taxes

The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities
are determined based on the difference 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 expected to 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 subject to assessment or challenge by relevant taxing authorities. The Company's assessment of an
uncertain tax position begins with the initial determination of the position'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 balance sheet date, unresolved uncertain
tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion
have 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 stock options issued to employees is measured based on the grant-date fair value of
the award. The fair value of each employee stock option is estimated on the date of grant using the Black-Scholes option-pricing
model. Stock-based compensation expense for stock units is measured based on the fair value of the award, which is determined
based upon the closing price of the Company’s common stock on the date of the grant. The Company grants performance-based
stock units to certain employees which vest upon the achievement of certain performance conditions, subject to the employees’
continued service with the Company. The probability of vesting is assessed at each reporting period and compensation cost is
adjusted based on this probability assessment.

The Company recognizes compensation costs on a straight-line basis for all employee stock-based compensation awards
that are expected to vest over the requisite service period of the awards, which is generally the awards' vesting period. Forfeitures
are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates.

Following the adoption of ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to
Nonemployee Share Based Payment Accounting by the Company on October 1, 2018, stock-based compensation expense for equity
instruments issued to non-employees is also measured based on the grant-date fair value of the awards using the Black-Scholes
option-pricing model. Prior to this, the fair value of such awards was subject to re-measurement as the underlying equity awards
vest.

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VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

Net Loss per Common Share

Basic net loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted-
average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted
net loss per common share is computed by dividing net loss attributable to common stockholders by the weighted-average number
of common share equivalents outstanding for the period determined using the treasury stock method. Potentially dilutive securities
consisting of options to purchase common stock, restricted stock units and shares subject to purchase under our employee stock
purchase plan are considered to be common stock equivalents and were excluded from the calculation of diluted net loss per
common share because their effect would be anti-dilutive for all periods presented.

Segment Reporting

The chief operating decision maker for the Company is the Chief Executive Officer, who reviews financial information
presented on a consolidated basis for purposes of allocating resources and assessing financial performance. The Company has a
single reporting unit associated with the development and commercialization of diagnostic products. Substantially all the
Company’s revenue for the years ended December 31, 2019, 2018 and 2017 was derived in the United States. All of the Company’s
long-lived assets were located in the United States as of December 31, 2019 and 2018.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-2, Leases (Topic 842). This ASU is aimed at making leasing activities
more transparent and comparable, and requires substantially all leases be recognized by lessees on their balance sheet as a right-
of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. The ASU was effective
for interim and annual periods beginning after December 15, 2018. Additionally, the FASB issued ASU No. 2018-11, Leases
(Topic 842): Targeted Improvements, which offers an additional transition method whereby entities may apply the new leases
standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings rather than
application of the new leases standard at the beginning of the earliest period presented in the financial statements. The Company
elected this transition method and adopted ASC 842 on January 1, 2019 and as a result, recorded operating lease right-of-use
("ROU") assets of $9.8 million, including offsetting deferred rent of $4.3 million, along with the associated operating lease liabilities
of $14.1 million. On January 1, 2019, the Company had finance lease ROU assets of $0.8 million and associated finance lease
liabilities of $0.3 million for leases classified as finance leases prior to the adoption of ASC 842. The adoption of ASC 842 had
an immaterial impact on the Company's consolidated statement of operations and comprehensive loss, consolidated statement of
stockholders' equity and consolidated statement of cash flows for the year ended December 31, 2019. In addition, the Company
elected the package of practical expedients permitted under the transition guidance within the new standard which allowed it to
carry forward the historical lease classification. Additional information and disclosures required by this new standard are contained
in Note 7, Commitments and Contingencies.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses
on Financial Instruments. This ASU requires measurement and recognition of expected credit losses for financial assets. This
guidance will become effective for the Company beginning January 1, 2020 with early adoption permitted. The Company does
not expect to have a material impact on its financial statements and related disclosures from the adoption of this guidance.

In November 2018,

the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808). Under this
ASU, transactions in collaborative arrangements are to be accounted for under ASC 606 if the counterparty is a customer for a
good or service (or bundle of goods and services) that is a distinct unit of account. Also, entities are precluded from presenting
consideration from transactions with a counterparty that is not a customer together with revenue recognized from ASC 606. This
ASU is effective for all interim and annual reporting periods beginning on or after December 15, 2019, with early adoption
permitted. The Company adopted this ASU in 2019 with no cumulative-effect adjustments or retrospective impact.

3. Net Loss Per Share

The following outstanding common stock equivalents have been excluded from diluted net loss per common share for the

years ended December 31, 2019, 2018 and 2017 because their inclusion would be anti-dilutive:

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VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

Shares of common stock subject to outstanding options

Employee stock purchase plan

Restricted stock units

Total common stock equivalents

4. Business Combination

Exclusive License to NanoString Diagnostics Platform

Year Ended December 31,

2019
5,394,944

26,124

712,122

2018
5,998,163

34,869

384,691

2017
6,163,734

34,559

63,425

6,133,190

6,417,723

6,261,718

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

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

Prosigna product technology

Prosigna customer relationships

nCounter FLEX Dx license

LymphMark product technology

Total identifiable intangible assets acquired

Goodwill

Net assets acquired

$

$

4,120

2,430

46,880

990

54,420
1,668

56,088

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

Prosigna product technology
Prosigna customer relationships
nCounter FLEX Dx license
LymphMark product technology

Estimated Useful life
(In Years)
15
5
15
7

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired.
This acquisition includes $1.7 million of goodwill which the Company believes consists principally of the organized workforce

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VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

that will help the Company execute its strategic plans in relation to the assets acquired. In accordance with ASC 350, goodwill
will not be amortized but will be tested for impairment at least annually. As of December 31, 2019, goodwill is not deductible for
tax purposes, however, if contingent consideration is paid at a future date, the portions of contingent consideration paid and allocated
to the intangible assets for tax purposes will be tax deductible. The accounting for this acquisition is preliminary and will be
finalized upon completion of the analysis of certain contracts acquired and executed as part of this acquisition along with the
impact on goodwill, should there be any.

The unaudited pro forma financial information in the table below summarizes the combined revenue for the Company and
acquired business from NanoString as though the acquisition had been executed as of January 1, 2018. The pro forma amounts
have been adjusted in the table below. NanoString’s historical books and records did not contain the operating expense information
to prepare the financial disclosures required in the pro forma table below. Thus, the pro forma financial disclosures are limited to
revenue only. The unaudited pro forma revenue information is for informational purposes only and is not necessarily indicative
of the revenue that would have been achieved if the acquisition had taken place as of January 1, 2018 (in thousands):

Product revenue

Year Ended December 31,

2019
11,040

$

2018
11,482

$

5. Balance Sheet Components

Property and Equipment, Net

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

Leasehold improvements

Laboratory equipment

Computer equipment

Software, including software developed for internal use

Furniture and fixtures

Construction-in-process

Total property and equipment, at cost

Accumulated depreciation and amortization

Total property and equipment, net

December 31,

2019

2018

$

5,926

$

9,655

1,709

3,226

1,482

1,015

23,013

(14,080)

$

8,933

$

5,825

8,895

1,615

2,450

1,435

726

20,946

(12,006)

8,940

Depreciation and amortization expense was $2.7 million, $2.9 million and $2.8 million for the years ended December 31,

2019, 2018 and 2017, respectively.

The Company had a capital lease for laboratory equipment that went into service in 2017. The lease was paid off in 2019
and the cost of $1.2 million was included in Property and Equipment as of December 31, 2019. The laboratory equipment had
accumulated depreciation of $600,000 and $367,000 at December 31, 2019 and 2018, respectively and depreciation of $233,000,
$232,000, and $135,000 for the years ended December 31, 2019, 2018 and 2017, respectively.

Finite-lived Intangible Assets, Net

Finite-live intangible assets consisted of the following (in thousands of dollars):

94

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

December 31, 2019

December 31, 2018

Gross
Carrying
Amount

Percepta product technology

$

16,000

Prosigna product technology

Prosigna customer relationships

nCounter FLEX Dx license

LymphMark product technology

4,120

2,430

46,880

990

Total

$

70,420

$

Accumulated
Amortization
$

Net
Carrying
Amount
(5,067) $10,933
4,103

(17)
(42)
(263)
(12)

2,388

46,617

978
(5,401) $65,019

Gross
Carrying
Amount
$ 16,000
—

—

—

Accumulated
Amortization
$

Net
Carrying
Amount
(4,000) $12,000
—

—

—

—

—

—

—
$ 16,000

$

—

—
(4,000) $12,000

Weighted
Average
Amortization
Period
(Years)
15

15

5

15

7

14.5

Amortization of the Percepta product technology, which was acquired from the acquisition of Allegro in September 2014,
began in April 2015 when research and development activities were deemed to be completed and is recognized on a straight-line
basis. Amortization of the Prosigna product technology, Prosigna customer relationships, nCounter FLEX Dx license and
LymphMark product technology, which were acquired under an agreement with NanoString, see Note 4 - Business Combination,
began in December 2019 and is recognized on a straight-line basis. Amortization of $1.4 million, $1.1 million and $1.1 million
was recognized for the years ended December 31, 2019, 2018, and 2017, respectively.

The estimated future aggregate amortization expense as of December 31, 2019 is as follows (in thousands of dollars):

Year Ending December 31,
2020

2021

2022

2023

2024

Thereafter

Total

Accrued Liabilities

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

Accrued compensation expense

Accrued other

Total accrued liabilities

Amounts

5,095

5,094

5,094

5,094

5,054

39,588

65,019

$

$

December 31,

2019

2018

$

$

10,100

3,634

13,734

$

$

6,412

2,774

9,186

95

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

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

•

•

•

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

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

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

The fair value of the Company's financial assets includes money market funds, overnight reverse repurchase agreements and
a deposit for the lease of the Company's South San Francisco facility. Money market funds, included in cash and cash equivalents
in the accompanying consolidated balance sheets, was $57.6 million and $76.6 million as of December 31, 2019 and 2018,
respectively, and are Level I assets as described above. Overnight reverse repurchase agreements, included in cash and cash
equivalents in the accompanying consolidated balance sheets, were $100.0 million and zero as of December 31, 2019 and 2018,
respectively, and are Level II assets as described above. There were no unrealized gains or losses from overnight reverse repurchase
agreements at December 31, 2019 and 2018. The deposit for the lease, included in restricted cash in the accompanying consolidated
balance sheets, was $603,000 as of December 31, 2019 and 2018, and is a Level I asset as described above.

The contingent consideration in Note 4, Business Combination, associated with the agreement with NanoString on December
3, 2019, is a Level III financial liability. As of December 31, 2019, the contingent consideration of $6.1 million is dependent on
the achievement of certain milestones and is payable in cash of up to $10.0 million. Estimation of the fair value of the contingent
consideration is based on historical and anticipated results, trends, and various other assumptions that the Company believes are
reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments
about the carrying value of the contingent consideration that are not readily apparent from other sources. Actual results could differ
from those estimates and assumptions. Changes to the forecasts for the achievement of milestones can significantly affect the
estimated fair value of the contingent consideration. There has been no change to the estimated fair value of the contingent
consideration from the date of the agreement with NanoString to December 31, 2019 and the Company will assess the fair value
of the contingent liability on a quarterly basis.

7. Commitments and Contingencies

Operating Leases

The Company leases its headquarters and laboratory facilities in South San Francisco, California under a non-cancelable
lease agreement for approximately 59,000 square feet. The lease began in June 2015 and ends in March 2026 and contains extension
of lease term and expansion options. In February 2017, the Company relinquished certain expansion rights for a nominal fee. The
Company had deposits of $603,000 included in long-term assets as of December 31, 2019 and 2018, restricted from withdrawal
and held by a bank in the form of collateral for an irrevocable standby letter of credit held as security for the lease of the South
San Francisco facility.

96

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

The Company also leases laboratory and office space in Austin, Texas under a lease that expires in January 2029 and includes
options for expansion and early termination in 2025. The Company provided a cash security deposit for this lease of $139,000,
included in other assets in the Company's balance sheets as of December 31, 2019 and 2018.

The Company determined its operating lease liabilities for the two operating leases mentioned above using a discount
rate of 7.53% based on the rate that the Company would have to pay to borrow on a collateralized basis for a similar lease an
amount equal to the lease payments in a similar economic environment. Operating lease liabilities along with the associated right-
of-use assets as of December 31, 2019 are disclosed in the accompanying consolidated balance sheets. After the adoption of ASC
842, the Company classified its deferred rent for tenant improvements with its operating lease right-of-use assets on the consolidated
balance sheets.

Future minimum lease payments under non-cancelable operating leases as of December 31, 2019 are as follows (in thousands

of dollars):

Year Ending December 31,
2020
2021

2022

2023

2024

Thereafter

Total future minimum lease payments

Less: amount representing interest

Present value of future lease payments

Less: short-term lease liabilities

Long-term lease liabilities

Amounts

2,332
2,401

2,472

2,543

2,614

4,226

16,588

3,675

12,913

1,407

11,506

$

$

The Company recognizes rent expense on a straight-line basis over the non-cancelable lease period. Rent expense was $1.9

million, $1.9 million, and $1.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Supplies Purchase Commitments

The Company had non-cancelable purchase commitments with suppliers to purchase a minimum quantity of supplies for

approximately $7.6 million at December 31, 2019.

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 litigation pending that could have, either individually or in the aggregate, a material impact on the
Company's financial statements.

97

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

8. Debt

Loan and Security Agreement

On November 3, 2017, the Company entered into a loan and security agreement (the “Loan and Security Agreement”) with
Silicon Valley Bank. The Loan and Security Agreement allows the Company to borrow up to $35.0 million, with a $25.0 million
advance term loan (the “Term Loan Advance”) and a revolving line of credit of up to $10.0 million (the “Revolving Line of Credit”).
The Term Loan Advance was advanced upon the closing of the Loan and Security Agreement and was used to pay the outstanding
balance of the Company’s existing long-term debt, which was canceled at that date. The Company had not drawn on the Revolving
Line of Credit as of December 31, 2019. Borrowings under the Loan and Security Agreement mature on October 1, 2022. Amounts
may be borrowed and repaid under the Revolving Line of Credit up until the earliest of full repayment or maturity of the Loan
and Security Agreement, termination of the Loan and Security Agreement, or October 1, 2022.

The Term LoanAdvance bears interest at a variable rate equal to (i) the thirty-day U.S. London Interbank Offer Rate (“LIBOR”)
plus (ii) 4.20%, with a minimum rate of 5.43% per annum. Principal amounts outstanding under the Revolving Line of Credit bear
interest at a variable rate equal to (i) LIBOR plus (ii) 3.50%, with a minimum rate of 4.70% per annum. The average Term Loan
Advance interest rate for the year ended December 31, 2019 was 6.70%.

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

In addition, a final payment on the Term Loan Advance in the amount of $1.2 million is due upon the earlier of the maturity
date of the Term Loan Advance or its payment in full. The Loan and Security Agreement contains customary representations,
warranties, and events of default such as a material adverse change in our business, operations or financial condition, as well as
affirmative and negative covenants. The negative covenants include, among other provisions, covenants that limit or restrict the
Company's ability to incur liens, make investments, incur indebtedness, merge with or acquire other entities, dispose of assets,
make dividends or other distributions to holders of its equity interests, engage in any new line of business, or enter into certain
transactions with affiliates, in each case subject to certain exceptions. The Company’s obligations under the Loan and Security
Agreement are secured by substantially all of its assets (excluding intellectual property), subject to certain customary exceptions.
The Loan and Security Agreement also requires the Company to achieve certain revenue levels tested quarterly on a trailing twelve-
month basis. However, failure to maintain the revenue levels will not be considered a default if the Company maintains liquidity
of at least $40.0 million. As of December 31, 2019, the Company was in compliance with the loan covenants.

As of December 31, 2019 and 2018, the net debt obligation for borrowings made under the Loan and Security Agreement

was as follows (in thousands of dollars):

Debt principal

End-of-term debt obligation

Unamortized debt issuance costs

Net debt obligation

December 31,

2019

2018

$

$

100

594

—

694

$

$

25,000

365

(83)

25,282

Future principal and end-of-term debt obligation payments due under the Loan and Security Agreement are $1.3 million in

2022.

The end-of-term debt obligation accretes over the term of the Loan and Security Agreement until maturity and is included

in interest expense in the Company's consolidated statement of operations and comprehensive loss.

98

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

Credit Agreement

In March 2016, the Company entered into a credit agreement (the “Credit Agreement”) with Visium Healthcare Partners, LP
(“Visium”). Under the Credit Agreement, two term loans were available to the Company with an aggregate principal amount of
up to $40.0 million. The Company drew down the initial $25.0 million term loan (the “Initial Term Loan”) on March 30, 2016, of
which $5.0 million was used to pay the outstanding balance of the Company’s previous long-term debt, which was canceled at
that date.

The Term Loans bore interest at a fixed rate of 12.0% per annum and no principal payments were due through March 31,
2020. The Company was obligated to repay the outstanding principal amounts under the Term Loans in eight equal installments
during the final two years under the Credit Agreement. Prepayment of the outstanding principal amount under the Term Loans
prior to March 31, 2018 was subject to a prepayment premium equal to 24.0% of the outstanding principal balance, less the
aggregate amount of all interest payments in cash. For any quarterly interest payment through and including the 16th interest
payment date after the Initial Borrowing Date, so long as no event of default had occurred and was then continuing, the Company
could have elected to pay interest in cash on the outstanding principal amounts of the Term Loans at a fixed rate of 9.0%, with the
remaining 3.0% of the 12.0% interest paid-in-kind by adding such paid-in-kind interest to the outstanding principal amounts of
the Term Loans. The Company elected to pay interest in-kind for the quarters ended June 30, 2016 and September 30, 2016,
totaling $385,000.

As noted above, upon entering into the Loan and Security Agreement, the Credit Agreement was paid in full and terminated
on November 3, 2017, wherein all commitments were terminated, all liens were released and all outstanding principal, interest
and fees accrued thereunder were repaid in the aggregate amount of $27.3 million, including a prepayment premium of $1.5 million.

Interest Expense

Interest expense was recognized as follows (in thousands of dollars):

Nominal debt interest

Amortization and write-off of debt discount and issuance costs

End-of-term debt obligation interest

Debt prepayment penalty

Interest on capital lease

Total

Year Ended December 31,

2019

2018

2017

332

107

229

—

9

$

1,568

$

57

312

—

26

677

$

1,963

$

2,838

472

53

1,536

42

4,941

$

$

99

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

9. Stockholders' Equity

Common 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 per share. 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 dividends whenever 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 convertible preferred stock outstanding. No dividends
have been declared as of December 31, 2019.

As of December 31, 2019 and 2018, the Company had reserved shares of common stock for issuance as follows:

Stock options and restricted stock units issued and outstanding
Stock options and restricted stock units available for grant under stock option plans

Common stock available for the Employee Stock Purchase Plan

Total

December 31,

2019
5,562,484
1,954,804

173,168

7,690,456

2018
6,235,258
1,571,658

309,419

8,116,335

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

In July 2018, the Company issued and sold 5,750,000 shares of common stock in a registered public offering, including
750,000 shares issued and sold upon the underwriters' exercise in full of their option to purchase additional shares, at a price to
the public of $10.25 per share. The Company's net proceeds from the offering were $55.0 million, after deducting underwriting
commissions and offering expenses of $3.9 million.

10. Stock Incentive Plans

Stock 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 stock and 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 of grant, 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% of the 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 granted must 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, that with 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 of stock 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.

In October 2013, the Company adopted the 2013 Stock Incentive Plan (the "2013 Plan"). The 2013 Plan was subsequently
approved by the Company's stockholders and became effective on November 4, 2013, immediately before the closing of the
Company's initial public offering ("IPO"). Following the effectiveness of the 2013 Plan, no additional options were granted under
the 2008 Plan. 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 to vesting restrictions under the 2008 Plan are subsequently forfeited or terminated for any

100

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

reason before being exercised or settled, the shares of common stock reserved 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 available for 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,
the 2013 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 as determined by the Company's Board of Directors. As of December 31, 2019, 1,954,799 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 to employees, 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 2013 Plan 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 of the Board of Directors. Options become exercisable and
expire as determined by the Compensation Committee, provided that the term of ISOs may not exceed ten years from the date of
grant. Stock option agreements may provide for accelerated exercisability in the event of an optionee's death, disability, or retirement
or other events.

Stock units are governed by stock unit agreements between the Company and recipients of stock units. Stock units may be
granted under the 2013 Plan and the number of stock units awarded are determined by the Compensation Committee of the Board
of Directors. Stock units vest and expire as determined by the Compensation Committee. Stock unit agreements may provide for
accelerated vesting in the event of a stock unit holder's death, disability, or retirement or other 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 Plan will be automatically granted an initial NSO to purchase 35,000 shares of common stock upon
first becoming a member of the Board of Directors. The shares subject to the initial option will vest and become exercisable one-
third (1/3) each of the first, second and third annual anniversaries of the date of grant. On the first business day after each regularly
scheduled annual meeting of stockholders, 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 of the Board of Directors thereafter will be automatically granted an
option to purchase 10,000 shares of common stock, provided that the outside director has served on 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 immediately
prior 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. The options 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 will become 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 date of grant or (ii) the date 12
months after the termination of the outside director's service for any reason.

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

101

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

Balance—December 31, 2018
Additional shares authorized
Granted - stock options
Granted - restricted stock units
Canceled
Exercised
Restricted stock units vested
Tax portion of restricted stock units vested

Balance—December 31, 2019

Options vested and exercisable—December 31,
2019
Options vested and expected to vest—December 31,
2019

Shares
Available
for Grant
1,571,658
1,634,528
(969,500)
(505,965)
180,017
—
—
44,066
1,954,804

Stock Options
Outstanding
and Unvested
Stock Units

6,235,258
—
969,500
505,965
(180,017)
(1,846,222)
(122,000)
—
5,562,484

2,651,858

4,442,275

Weighted
Average
Exercise Price
of Stock
Options

$

7.95

Weighted
Average
Remaining
Contractual
Life of Stock
Options
(Years)

Aggregate
Intrinsic
Value of
Stock
Options

6.95

$

27,340

21.16

9.40
7.77

$

$

$

10.66

6.97

$

79,760

8.13

10.48

5.90

6.91

$

$

52,469

77,453

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 of the Company's common stock, which was $27.92 and $12.58 per share as of December 31, 2019
and 2018, respectively.

The weighted average fair value of options to purchase common stock granted was $11.07, $3.62 and $4.49 for the years

ended December 31, 2019, 2018 and 2017, respectively.

The aggregate estimated grant date fair value of employee options to purchase common stock vested during the years ended

December 31, 2019, 2018 and 2017 was $4.4 million, $4.1 million and $3.1 million, respectively.

The intrinsic value of stock options exercised was $31.3 million, $4.9 million and $0.7 million for the years ended

December 31, 2019, 2018 and 2017, respectively.

The weighted average fair value of restricted stock units granted was $21.90 and $6.17 for the years ended December 31,
2019 and 2018, respectively. The intrinsic value of restricted stock units vested was $2,720,000 and $184,000 for the years ended
December 31, 2019 and 2018, respectively.

Employee Stock Purchase Plan

In May 2015, the Company's stockholders approved the Company's ESPP. The ESPP provides eligible employees with an
opportunity to purchase common stock from the Company and to pay for their purchases through payroll deductions. The ESPP
will be implemented through a series of offerings of purchase rights to eligible employees. Under the ESPP, the Compensation
Committee of the Company's Board of Directors may specify offerings with a duration of not more than 12 months, and may
specify shorter purchase periods within each offering. During each purchase period, payroll deductions will accumulate, without
interest. On the last day of the purchase period, accumulated payroll deductions will be used to purchase common stock for
employees 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 of the 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 began on August 3, 2015 and that the purchase price will be 85% of the fair market value per share

102

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

of the Company's common stock on either the offering date or the purchase 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 approval of the independent members
of the Compensation Committee of the Company's Board of Directors. The Compensation Committee has determined that if the
fair market value of a share of the Company's common stock on any purchase date 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 terminate and 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 such purchase date.

No employee is permitted to accrue, under the ESPP, a right to purchase stock of the Company having 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-based Compensation

The following table summarizes stock-based compensation expense related to stock options, restricted stock units and the
ESPP for the years ended December 31, 2019, 2018 and 2017, and are included in the consolidated statements of operations and
comprehensive loss as follows (in thousands of dollars):

Cost of testing revenue

Research and development

Selling and marketing

General and administrative

Total stock-based compensation expense

Year Ended December 31,

2019

2018

2017

277

$

130

$

1,856

2,938

4,736

1,018

1,866

2,944

9,807

$

5,958

$

133

1,495

1,899

3,090

6,617

$

$

As of December 31, 2019, the Company had $18.4 million of unrecognized compensation expense related to unvested stock
options and restricted stock units, which is expected to be recognized over an estimated weighted-average period of 2.20 years.

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

based on the following assumptions:

Year Ended December 31,

Weighted-average volatility

Weighted-average expected term (years)

Risk-free interest rate

Expected dividend yield

2019

2018
52.90 - 53.40% 50.40 - 52.70% 50.40 - 52.40%

2017

5.50 - 6.08

5.50 - 6.08

5.50 - 6.08

1.90 - 2.60%

2.40 - 3.10%

1.80 - 2.33%

—

—

—

The estimated fair value of non-employee stock options was calculated using the Black-Scholes option-pricing model, based

on the following assumptions:

Weighted-average volatility

Weighted-average expected term (years)

Risk-free interest rate

Expected dividend yield

103

Year Ended December 31,

2018

2017

43.60 - 50.50% 50.40 - 51.10%

0.25 - 6.75

6.80 - 7.75

1.84 - 2.87%

2.16 - 2.37%

—

—

2019
—%

—

—%

—

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

There were no non-employee stock options outstanding as of December 31, 2019.

The estimated grant date fair value of the ESPP shares was calculated using the Black-Scholes option-pricing model, based

on the following assumptions:

Year Ended December 31,

Weighted-average volatility

Weighted-average expected term (years)

Risk-free interest rate

Expected dividend yield

2019

2018
53.38 - 71.77% 42.88 - 47.74% 37.00 - 43.86%

2017

0.50 - 1.00

0.50 - 1.00

0.50 - 1.00

1.88 - 2.56%

1.64 - 2.45%

0.65 - 1.22%

—

—

—

104

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

11. Thyroid Cytopathology Partners

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

TCP's portion of rent and related operating expenses reimbursed to the Company for the shared space at the Austin, Texas
facility was $11,000, $128,000 and $114,000 for the years ended December 31, 2019, 2018 and 2017 and is included other income,
net in the Company's consolidated statements of operations and comprehensive loss.

12. Income Taxes

The Company generated a pretax loss of $12.5 million, $23.0 million and $31.0 million in the United States for the years
ended December 31, 2019, 2018 and 2017, respectively. Since inception, the Company has not generated any pretax income or
loss outside of the United States. The Company recorded no provision for income taxes during the years ended December 31,
2019, 2018 or 2017.

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

U.S. federal taxes at statutory rate

State tax (net of federal benefit)

Non deductible officers' compensation

Stock based compensation - PSU/RSU/NQSQ

Permanent differences

Incentive stock options

Tax credits

Change in valuation allowance

Rate differential impact - Tax Cuts and Jobs Act
Total

Year Ended December, 31,

2019

2018

2017

$

(2,632) $

(4,825) $

(10,541)

(828)

439

628

221

(4,994)

(996)

8,162

$

—

— $

—

409

—

285

(256)

(777)

5,164

—

— $

15

—

—

198

994

(588)

(14,552)

24,474

—

105

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred
tax assets and liabilities are as follows (in thousands of dollars):

Deferred tax assets:

Net operating loss carryforwards

Research and development credits

Stock-based compensation

NanoString intangibles and goodwill

Operating lease liability

Accruals and other

Gross deferred tax assets

Valuation allowance

Net deferred tax assets

Deferred tax liabilities:

Property and equipment

In-process research and development

ROU assets

Gross deferred tax liabilities

Net deferred tax liabilities

Net deferred taxes

Year Ended December 31,

2019

2018

2017

$

56,506

$

50,410

$

47,177

5,579

2,246

380

3,068

2,610
70,389

(65,228)

5,161

(471)

(2,597)

(2,093)

(5,161)

(5,161)

4,584

1,032

—

—

2,918
58,944

(55,366)

3,578

(695)

(2,883)

—

(3,578)

(3,578)

$

— $

— $

4,034

2,068

—

—

2,375
55,654

(51,657)

3,997

(983)

(3,014)

—

(3,997)

(3,997)

—

The Company has established a full valuation allowance against its net deferred tax assets due to the uncertainty surrounding
realization of such assets. The valuation allowance increased $9.9 million during the year ended December 31, 2019, increased
$3.7 million during the year ended December 31, 2018 and decreased $14.3 million during the year ended December 31, 2017.

As of December 31, 2019, the Company had net operating loss carryforwards of approximately $236.9 million, $58.3 million
and $45.2 million available to reduce future taxable income, if any, for federal, California and other state income tax purposes,
respectively. The U.S. federal net operating loss carryforwards will begin to expire in 2026 while for state purposes, the net
operating losses began to expire in 2028.

As of December 31, 2019, the Company had net research and development credit carryforwards of approximately $4.9
million and $4.7 million available to reduce future taxable income, if any, for federal and state income tax purposes, respectively.
The federal credit carryforwards begin to expire in 2028. California credits have no expiration date. Other state credit carryforwards
begin to expire in 2023.

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 "ownership change" of a corporation. Accordingly, a company's ability to use net operating losses and tax credits
may be limited as prescribed under Internal Revenue Code Section 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 in any 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 net
operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the IRC
Section 382 rules and similar state provisions. In the event the Company has any changes in ownership, net operating losses and
research and development credit carryovers could be limited and may expire unutilized.

Uncertain Tax Positions

106

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

As of December 31, 2019, the Company had unrecognized tax benefits of $3.3 million, none of which would currently affect
the Company's effective tax rate if recognized due to the Company's deferred tax assets being fully offset by a valuation allowance.
The Company does not anticipate that the amount of unrecognized tax benefits relating to tax positions existing at December 31,
2019 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):

Year Ended December 31,

2019

2018

2017

Unrecognized tax benefits, beginning of period

$

2,799

$

2,523

$

2,222

Gross increases—tax position in prior period

Gross decreases—tax position in prior period

Gross increases—current period tax position

Lapse of statute of limitations
Unrecognized tax benefits, end of period

—

—

479

—
3,278

$

—

(97)

373

—
2,799

$

$

—

—

301

—
2,523

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 interest expense, respectively, as necessary. There was no interest expense or penalties related to unrecognized
tax benefits recorded through December 31, 2019.

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 Federal and state tax authorities for three and four years, 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.

13. 401(k) Plan

The Company sponsors a 401(k) defined contribution plan covering all employees. Employer contributions to the plan were

$509,000, $448,000 and $324,000 for the years ended December 31, 2019, 2018, and 2017, respectively.

14. 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, 2019. The Company believes this information reflects all recurring adjustments necessary to fairly present this
information when read in conjunction with the Company's financial statements 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 year because 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 be expected for any future period (in thousands of dollars, except for share and per share data):

107

VERACYTE, INC.

Notes to Consolidated Financial Statements (Continued)

Quarter Ended
2019:
Revenue

Net loss

Net loss per common share, basic and diluted

Shares used to compute net loss per common share, basic
and diluted

2018:
Revenue

Net loss

Net loss per common share, basic and diluted

Shares used to compute net loss per common share, basic
and diluted

March 31

June 30

September 30

December 31

$

$

$

29,529
(1,917)
(0.05)

$

30,136
(2,494)
(0.05)

$

30,973
(730)
(0.02)

29,730
(7,458)
(0.15)

41,168,593

45,586,081

48,588,296

49,095,703

$

20,041
(9,177)
(0.27)

$

22,751
(6,248)
(0.18)

$

23,466
(4,469)
(0.12)

25,750
(3,105)
(0.08)

34,271,254

34,314,234

38,620,036

40,731,334

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

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

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 the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of 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 the degree of compliance with policies
or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2019 using the criteria established in Internal Control Integrated Framework ("2013 Framework") issued by
the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

108

Based on our evaluation using those criteria, our management has concluded that, as of December 31, 2019, our internal
control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

In accordance with guidance issued by the Securities and Exchange Commission, companies are permitted to exclude
acquisitions from their final assessment of internal control over financial reporting for the first fiscal year in which the acquisition
occurred. Our management’s evaluation of internal control over financial reporting excluded the internal control activities of the
diagnostics business which we acquired from NanoString Technologies, Inc. on December 3, 2019, as discussed in Note 4 to our
consolidated financial statements. We have included the financial results of the acquired business in the consolidated financial
statements from the date of acquisition. Revenue from the acquired business comprised less than 1% of our total revenue for the
year ended December 31, 2019 and approximately 5% of our accounts receivable as of December 31, 2019.

Changes 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 in connection with the evaluation identified above that occurred during the quarter ended December 31,
2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Veracyte Inc.

Opinion on Internal Control over Financial Reporting
We have audited Veracyte, Inc.’s internal control over financial reporting as of December 31, 2019, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) (the COSO criteria). In our opinion, Veracyte, Inc. (the Company) maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment
of and conclusion on the effectiveness of internal control over financial reporting did not include the internal control activities of
the diagnostics business acquired from NanoString Technologies, Inc. on December 3, 2019, which is included in the 2019
consolidated financial statements of the Company and constituted less than 1% of the Company’s total revenue, for the year ended
December 31, 2019, and approximately 5% of its accounts receivable as of December 31, 2019. Our audit of internal control over
financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the diagnostic
business acquired from NanoString Technologies, Inc.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the 2019 consolidated financial statements of the Company and our report dated February 25, 2020 expressed an
unqualified opinion thereon.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.

109

Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Redwood City, California
February 25, 2020

ITEM 9B. OTHER INFORMATION

None.

110

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item with respect to directors is incorporated by reference from the information contained
in our proxy statement to be filed with the Securities and Exchange Commission no later than 120 days from the end of our fiscal
year ended December 31, 2019 in connection with the solicitation of proxies for our 2020 Annual Meeting of Stockholders, or the
Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to our Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to our Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated by reference to our Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to our Proxy Statement.

111

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

PART IV

(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 notes thereto.

3.

Exhibits

See Item 15(b) below. Each management contract or compensating plan or arrangement required to be filed has been

identified.

(b) Exhibits (to be updated)

Exhibit
Number

3.1

3.2

4.1

4.2

Description

Form

File No.

Exhibit Filing Date

Filed
Herewith

Incorporated by Reference

Restated Certificate of Incorporation of the
Registrant

Restated Bylaws of the Registrant

8-K

8-K

001-36156

3.1

11/8/2013

001-36156

3.2

11/8/2013

Form of Common Stock Certificate

S-1/A

333-191282 4.1

10/15/2013

Description of Securities Registered under Section
12 of the Securities Exchange Act of 1934, as
amended

X

10.1#

Form of Indemnification Agreement between the
Registrant and its officers and directors

S-1/A

333-191282 10.1

10/7/2013

10.2#

2008 Stock Plan and forms of agreements thereunder S-1

333-191282 10.2

9/20/2013

10.3#

2013 Stock Incentive Plan, as amended, and forms
of stock option award agreement, stock option
exercise agreement, restricted stock agreement and
restricted stock unit agreement

10-K

001-36156

10.3

2/27/2018

10.4#

Employee Stock Purchase Plan

10-Q

001-36156

10.1

8/13/2015

10.5

10.6

10.7

Lease Agreement between Riata Holdings, L.P., as
landlord, and the Registrant, as tenant, dated
November 28, 2012

Second Amendment to Lease Agreement dated as of
August 14, 2017 by and between BRI 1868 RIATA,
LLC and the Registrant

First Amendment to Lease Agreement dated as of
January 7, 2014 by and between Riata Holdings, L.P.
and the Registrant

S-1

333-191282 10.6

9/20/2013

10-Q

001-36156

10.1

11/7/2017

10-K

001-36156

10.7

3/20/2014

112

10.8

10.9

10.10

Office Building Lease by and between American
Fund US Investments LP and the Registrant dated
April 29, 2015
First Amendment to Office Building Lease dated
May 3, 2016 by and between American Fund US
Investments LP and the Registrant

Second Amendment to Office Building Lease dated
February 8, 2017 by and between CRP 6000
Shoreline, L.L.C. and the Registrant

10.11#

Employment Agreement, dated as of February 15,
2008, between Bonnie Anderson and the Registrant

10.12#

10.13#

10.14#

10.15#

Amendment to Bonnie Anderson Employment
Agreement, dated as of December 22, 2008, between
Bonnie Anderson and the Registrant

Amendment No. 2 to Bonnie Anderson Employment
Agreement, effective as of March 11, 2009, between
Bonnie Anderson and the Registrant

Services and Separation Agreement, effective April
22, 2019, between Christopher M. Hall and the
Registrant
Offer Letter dated as of March 5, 2008 with Giulia
Kennedy

10.16#

Offer Letter dated as of August 9, 2011 with John
Hanna

10.17†

10.18

10.19#

Amended and Restated Pathology Services
Agreement dated as of February 14, 2019 between
Thyroid Cytopathology Partners, P.A. and the
Registrant

Loan and Security Agreement dated as of November
3, 2017 between Silicon Valley Bank and the
Registrant

Offer Letter dated as of November 17, 2016 with
Keith Kennedy

Incorporated by Reference

10-Q

001-36156

10.2

8/13/2015

10-K

001-36156

10.9

2/27/2018

10-K

001-36156

10.10

3/1/2017

S-1

S-1

S-1

333-191282 10.10

9/20/2013

333-191282 10.11

9/20/2013

333-191282 10.12

9/20/2013

10-Q

001-36156

10.1

7/30/2019

X

X

10-Q

001-36156

10.1

4/30/2019

10-K

001-36156

10.19

2/27/2018

10-K

001-36156

10.20

2/27/2018

10.20

Form of Performance Stock Unit

10-Q

001-36156

10.1

5/1/2018

10.21#

10.22#

10.23#

10.24#

10.25†

Amended and Restated Change in Control and
Severance Agreement, effective July 1, 2019
between Bonnie Anderson and the Registrant

Amended and Restated Change in Control and
Severance Agreement, effective July 1, 2019
between Keith Kennedy and the Registrant

Amended and Restated Change in Control and
Severance Agreement, effective July 1, 2019
between Giulia Kennedy and the Registrant

Amended and Restated Change in Control and
Severance Agreement, effective July 1, 2019
between John Hanna and the Registrant

Diagnostic Development Agreement, dated
December 28, 2018, between Johnson & Johnson
Services, Inc. and the Registrant

10-Q

001-36156

10.2

7/30/2019

10-Q

001-36156

10.3

7/30/2019

10-Q

001-36156

10.4

7/30/2019

10-Q

001-36156

10.5

7/30/2019

10-K

001-36156

10.22

2/25/2019

113

10.26†

License and Asset Purchase Agreement, dated
December 3, 2019, between NanoString
Technologies, Inc. and the Registrant

Incorporated by Reference

8-K

001-36156

2.1

12/3/2019

10.27

Registration Rights Schedule, dated December 3,
2019

8-K

001-36156

4.1

12/3/2019

21.1

23.1

24.1

31.1

31.2

32.1*

32.2*

List of Subsidiaries

Consent of Independent Registered Public
Accounting Firm

Power of Attorney (see the signature page of this
Annual Report on Form 10-K)

Principal Executive Officer’s Certification Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002

Principal Financial Officer’s Certification Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002

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

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

101.INS XBRL Instance Document

101.SCH Inline XBRL Taxonomy Extension Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation
Linkbase

101.DEF

Inline XBRL Taxonomy Extension Definition
Linkbase

101.LAB Inline XBRL Taxonomy Extension Label Linkbase

101.PRE

Inline XBRL Taxonomy Extension Presentation
Linkbase

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

104

_____________________________________________

X

X

X

X

X

X

X

X

X

X

X

X

X

X

#

*

†

Indicates management contract or compensatory plan or arrangement.

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

Registrant is requesting or has previously been granted confidential treatment with respect to certain
portions of this Exhibit.

Copies of the above exhibits not contained herein are available to any stockholder, upon payment of a reasonable per page fee,
upon written request to: Chief Financial 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.

114

ITEM 16. FORM 10-K SUMMARY

Not applicable.

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 behalf by the undersigned, thereunto duly authorized.

SIGNATURES

VERACYTE, INC.
By:

/s/ BONNIE H. ANDERSON

Bonnie H. Anderson
Chairman and Chief Executive Officer

Date: February 25, 2020

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints
Bonnie H.Anderson and Keith Kennedy, 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 any amendments to this annual report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying
and confirming all that each of said attorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following

persons, on behalf of the registrant on the dates and the capacities indicated.

Signature

Title

Date

/s/ BONNIE H. ANDERSON
Bonnie H. Anderson

Chairman and Chief Executive Officer
(Principal Executive Officer)

February 25, 2020

/s/ KEITH KENNEDY
Keith Kennedy

/s/ JOHN L. BISHOP
John L. Bishop

/s/ FRED E. COHEN, M.D., D.PHIL.
Fred E. Cohen, M.D., D.Phil.

/s/ KARIN EASTHAM
Karin Eastham

/s/ ROBERT S. EPSTEIN
Robert S. Epstein

/s/ KEVIN K. GORDON
Kevin K. Gordon

/s/ EVAN JONES
Evan Jones

/s/ TINA S. NOVA, PH.D.
Tina S. Nova, Ph.D.

Chief Financial Officer (Principal Financial
Officer)

February 25, 2020

Lead Independent Director

February 25, 2020

February 25, 2020

February 25, 2020

February 25, 2020

February 25, 2020

February 25, 2020

February 25, 2020

Director

Director

Director

Director

Director

Director

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