CASTLE BIOSCIENCES INC - Annual Report: 2019 (Form 10-K)

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•	estimates of our addressable market, future revenue, expenses, capital requirements and our needs for additional financing;

•	expectations with respect to reimbursement for our products, including third-party payor reimbursement and coverage decisions;

•	anticipated cost, timing and success of our products in development, and our plans to research, develop and commercialize new tests;

•	our ability to obtain funding for our operations, including funding necessary to complete the expansion of our operations and development of our product candidates;

•	the implementation of our business model and strategic plans for our products, technologies and businesses;

•	our ability to manage and grow our business by expanding our sales to existing customers or introducing our products to new customers;

•	our ability to develop and maintain sales and marketing capabilities;

•	regulatory developments in the United States and foreign countries;

•	the performance of our third-party suppliers;

•	the success of competing diagnostic products that are or become available;

•	our ability to attract and retain key personnel;

•	our expectations regarding the period during which we qualify as an emerging growth company under the Jumpstart Our Business Startups Act, as amended, or the JOBS Act, enacted in April 2012; and

•	our expectations regarding our ability to obtain and maintain intellectual property protection for our products and our ability to operate our business without infringing on the intellectual property rights of others.

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Development of our products required our machine learning expertise and our proprietary algorithm, which are complex and difficult to replicate. We develop our products using our machine-learning expertise to analyze clinical specimens with associated long-term outcomes data to identify genomic patterns in tumor biology that we believe will accurately predict the risk of metastasis and recurrence. We then validate these genomic patterns, by refining and locking down algorithms to enable additional studies to validate the accuracy of our tests and subsequently document the clinically actionable changes made by physicians when they incorporate our test results into their treatment plan decisions.

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We have demonstrated the ability to provide clinically actionable information despite the complex genomics of skin cancer. In the diagnosis and prognosis of cancer, there is significant current interest in DNA driver mutations as being a predictor of the behavior of cancers. We believe that while the behavior of some cancers may be elucidated by DNA analysis and the response to certain targeted therapies, the majority of skin cancer behavior will best be understood at the gene expression level. Specifically, while DNA mutations of a specific gene are important for tumor

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Our growing database of tumor samples and associated long-term outcomes data enables us to improve our current products and accelerate development of new products. The development and validation of accurate tests is a complex process that requires access to tumor tissue specimens and long-term outcomes data. Such data is not readily available for skin cancer, which creates a barrier to rapid test development and validation. However, over the past ten years we created a sample bank comprised of over 55,000 samples, including 5,900 well-annotated samples that we have used in our clinical studies to date. We have been able to use this sample bank to expand the clinical use of our products, evaluate improvements in new proprietary genomic algorithm approaches and develop new products.

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We have generated, and will continue to generate, robust clinical validity and utility data supporting the use of our products. For example, DecisionDx-Melanoma has been studied in more than 5,700 patient samples, including 22 published studies since 2015. We also are making significant investments in further clinical studies to continue to support DecisionDx-Melanoma, DecisionDx-UM and our pipeline products. This growing set of data is significant in educating physicians and patients about the value of our products and supporting reimbursement of our products by third-party payors.

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We have established relationships with physicians that allow us to optimize our interactions, increase adoption of our current products and identify areas of unmet clinical need to efficiently launch additional products. We have published rigorous clinical data, which allows our sales and medical affairs representatives to have substantive, in depth dialogues with physicians. Through these established relationships we have been able to integrate our products into physicians’ workflows and identify further educational programs, which we believe drives adoption of our products. We can also leverage these relationships to identify areas of significant unmet medical need and efficiently launch additional skin cancer products.

•	We have experience in navigating the reimbursement landscape. In the molecular diagnostics industry securing reimbursement for new tests is a long, complex and uncertain process. We have developed significant expertise in securing reimbursement for our products.

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Expand adoption of our currently marketed products and educate physicians and their patients on the need for our products to make a more informed treatment plan decision. We believe that cancer treatment plans will be most effective if decisions are personalized for each patient based on the biology of their specific tumor, instead of a one-size-fits-all approach. We will continue to educate physicians and their patients on the diagnostic discordance that leads to over- and under-treatment.

•	Continue to generate evidence supporting the clinical utility and validity of our products. We have conducted extensive clinical utility and validity studies to support the adoption of, and reimbursement for, our products. In order to maintain our competitive advantage and increase sales of our products, we will continue to generate additional clinical data to support the use of our products.

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Execute planned expansion of our commercial channel. We plan to increase sales of our products by adding new physicians to our customer base as well as increasing orders by physicians already using our products. We increased the number of sales and medical affairs representatives in the first quarter of 2019 with a second expansion occurring in December 2019. We will evaluate the needs of our customers through 2020 and may make additional commercial investments to better support the educational needs of our customers with our currently marketed products as well as support the launch of additional products.

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Expand coverage and reimbursement for our products. We plan to increase dialogue with third-party payors to highlight our clinical utility and patient outcomes data. We believe these data will validate the benefit of our products for patients and will persuade more third-party payors to provide coverage and reimbursement. Additionally, we will continue to emphasize our ability to reduce overall cost to the healthcare system by appropriately classifying high-risk patients and removing the need for unnecessary invasive products for low-risk patients.

•	Utilize our development expertise and commercial channel insight to provide additional solutions. We are continuing to develop products that address the challenges facing physicians, including genomic tests for patients with

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Better Information for Physicians. We provide physicians and their patients with a report that contains clinically actionable information to inform the treatment plan for each individual patient. Our reports are updated as new clinical data is generated that may enable additional clinical decisions to be made. Based on four studies that we have conducted on clinical actionability, based on our test reports, physicians changed a patient’s treatment in more than 50% of cases, indicating physician confidence in the evidence underlying our reports.

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Better Patient Care. The clinical evidence shows that our products are accurate predictors of a patient’s specific risk of metastasis or recurrence of their cancer based upon the gene expression profile of their tumor, independent of available clinical and pathology factors. Physicians use this information to identify patients who are likely to benefit from an escalation of care as well as those who may avoid unnecessary treatments, such as medical and surgical interventions.

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Reduced Healthcare Costs for Payors. We believe our products have the potential to reduce overall healthcare costs by enabling physicians and their patients to avoid unnecessary medical and surgical interventions, including the SLNB surgery. As an example, without DecisionDx-Melanoma, 88% of patients who receive the SLNB surgery, which has an average in-patient reimbursed cost of $20,000 to $24,000, are found to be SLN-negative and remain classified as low risk. If all patients eligible for the SLNB surgery were tested and their test results were acted upon, we estimate the potential savings to the U.S. healthcare system could be up to $250 million, after considering the cost of DecisionDx-Melanoma.

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•	Proprietary, disciplined approach to genomic analysis including the use of proprietary deep learning, machine learning and other techniques to identify and optimize gene selection and algorithmic approaches to answer the clinically important questions with accuracy tests. This involves the ability to design and efficiently conduct the right clinical studies at the right time;

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•	Research and development investments to document the quality, quantity, consistency and strength of the clinical validity data, the impact our products have on clinical use, and demonstration of net health outcome improvement that reduce health system costs;

•	Maintaining a strong reputation with the treating physician by providing consistent, transparent, clinically relevant information that will improve the appropriate management of their patients;

•	Ease of use in accessing our products, reimbursement support for the physician and their patient and laboratory reports that clearly communicate the clinically relevant data points;

•	Demonstrated ability to work with, and secure coverage and reimbursement from, governmental and commercial payors;

•	Ability to efficiently commercialize pipeline products to the same customer base as our current products.

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•	the device may not be shown safe or effective to the FDA’s satisfaction;

•	the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval;

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•	the manufacturing process or facilities may not meet applicable requirements; and

•	changes in FDA approval policies or adoption of new regulations may require additional data.

•	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 for each bill or claim for a service arising out of the prohibited referral;

•	the imposition of up to three times the amounts for each item or service wrongfully claimed;

•	possible exclusion from federal healthcare programs, including Medicare and Medicaid; and

•	a civil penalty for each arrangement or scheme that the parties know (or should know) has the principal purpose of circumventing the Stark Law’s prohibition.

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•	increase our sales and marketing efforts for DecisionDx-Melanoma and address competitive developments;

•	fund ongoing development of our pipeline products, including for SCC and suspicious pigmented lesions, in addition to other programs in development;

•	expand our laboratory testing facility and related testing capacity;

•	expand our technologies into other types of skin cancer management and detection products;

•	acquire, license or invest in technologies;

•	acquire or invest in complementary businesses or assets; and

•	finance capital expenditures and general and administrative expenses.

•	our ability to achieve revenue growth;

•	our rate of progress in establishing payor coverage and reimbursement arrangements with third-party payors;

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•	our rate of progress in, and cost of the sales, marketing, coverage and reimbursement activities associated with, establishing adoption of DecisionDx-Melanoma, among our other products;

•	the cost of expanding our laboratory operations and offerings, including our sales, marketing, coverage and reimbursement efforts;

•	our rate of progress in, and cost of research and development activities associated with, diagnostic products in research and early development;

•	the potential cost of, and delays in, the development of new products as a result of changes in regulatory oversight applicable to our products; and

•	the effect of competing technological and market developments.

•	differences between the billing rates and reimbursement rates for our products;

•	compliance with complex federal and state regulations related to billing government healthcare programs, including Medicare, Medicaid and TRICARE;

•	risk of government audits related to billing;

•	disputes among payors as to which party is responsible for payment;

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

•	the effect of patient co-payments or co-insurance and our ability to collect such payments from patients;

•	changes to billing codes used for our products;

•	changes to requirements related to our current or future clinical studies, including our registry studies, which can affect eligibility for payment;

•	ongoing monitoring provisions of LCDs for our products, which can affect the circumstances under which a claim would be considered medically necessary;

•	incorrect or missing billing information; and

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

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•	our ability to increase awareness of our products through successful clinical utility and validity studies;

•	the rate of adoption of our products by physicians and other healthcare providers;

•	our ability to achieve guideline inclusion for our products;

•	the timeliness with which we can provide our clinical reports to the ordering physician;

•	the timing and scope of any regulatory approval for our products, if such approvals become required, and maintaining ongoing compliance with regulatory requirements;

•	our ability to obtain and maintain positive coverage decisions for our products from government and commercial payors;

•	our ability to obtain and maintain adequate reimbursement from third-party payors, including Medicare, Medicare Advantage plans, United Healthcare and BlueCross BlueShield plans, which accounted for an aggregate of approximately 90% and 83% of our total revenue for the years ended December 31, 2019 and 2018, respectively;

•	the impact of our investments in research and development and commercial growth;

•	negative publicity regarding our or our competitors’ products resulting from scientific publications, or defects or errors in the products; and

•	our ability to further validate our products through clinical research and accompanying publications.

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•	federal and state laws applicable to test ordering, documentation of tests ordered, billing practices and claims payment and/or regulatory agencies enforcing those laws and regulations;

•	federal and state fraud and abuse laws;

•	federal and state laboratory anti-mark-up laws;

•	coverage and reimbursement levels by Medicare, Medicaid, other governmental payors and private insurers;

•	restrictions on coverage of and reimbursement for tests;

•	federal and state laws governing laboratory testing, including CLIA, and state licensing laws;

•	federal and state laws and enforcement policies governing the development, use and distribution of diagnostic medical devices, including LDTs;

•	federal, state and local laws governing the handling and disposal of medical and hazardous waste;

•	federal and state Occupational Safety and Health Administration rules and regulations; and

•	the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and similar state data privacy laws.

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the federal Anti-Kickback Statute, or the AKS, which prohibits, among other things, any person or entity from knowingly and willfully soliciting, receiving, offering or paying any remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of an item or service reimbursable, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs. The term ‘‘remuneration’’ has been broadly interpreted to include anything of value, such as specimen collection materials or test kits. There are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, however these are drawn narrowly. Additionally, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Violations are subject to civil and criminal fines and monetary penalties of up to $100,000 for each violation, plus up to three times the remuneration involved, imprisonment of up to ten years and exclusion from government healthcare programs. In addition, the ACA codified case law that a claim including items or services resulting from a violation of the AKS constitutes a false or fraudulent claim for purposes of the federal False Claims Act, or the FCA;

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the Stark Law, which prohibits a physician from making a referral for certain designated health services covered by the Medicare or Medicaid program, including laboratory and pathology services, if the physician or an immediate family member of the physician has a financial relationship with the entity providing the designated health services and prohibits that entity from billing, presenting or causing to be presented a claim for the designated health services furnished pursuant to the prohibited referral, unless an exception applies. Sanctions for violating the Stark Law include denial of payment, civil monetary penalties and exclusion from the federal health care programs. Failure to refund amounts received as a result of a prohibited referral on a timely basis may constitute a false or fraudulent claim and may result in civil penalties and additional penalties under the FCA;

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federal civil and criminal false claims laws and civil monetary penalty laws, such as the FCA, which can be enforced by private citizens through civil qui tam actions, prohibits individuals or entities from, among other things, knowingly presenting, or causing to be presented through distribution of template medical necessity language or other coverage and reimbursement information, false, fictitious or fraudulent claims for payment or approval by the federal government, including federal health care programs, such as Medicare and Medicaid, and knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim, or knowingly making a false statement to improperly avoid, decrease or conceal an obligation to pay money to the federal government. In addition, a claim including items or services resulting from a violation of the AKS constitutes a false or fraudulent

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HIPAA, which, among other things, imposes criminal liability for executing or attempting to execute a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement or representation, in connection with the delivery of or payment for healthcare benefits, items or services. Like the AKS, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, which imposes privacy, security and breach reporting obligations with respect to individually identifiable health information upon entities subject to the law, such as health plans, healthcare clearinghouses and certain healthcare providers, known as covered entities, and their respective business associates, individuals or entities that perform services for them that involve individually identifiable health information. Failure to comply with the HIPAA privacy and security standards can result in civil monetary penalties, and, in certain circumstances, criminal penalties. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in U.S. federal courts to enforce HIPAA and seek attorneys’ fees and costs associated with pursuing federal civil actions;

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state laws that prohibit other specified practices, such as billing physicians for tests that they order or providing tests at no or discounted cost to induce physician or patient adoption; insurance fraud laws; waiving coinsurance, copayments, deductibles, and other amounts owed by patients; billing a state Medicaid program at a price that is higher than what is charged to one or more other third-party payors employing, exercising control over or splitting professional fees with licensed professionals in violation of state laws prohibiting fee splitting or the corporate practice of medicine and other professions; and

•	federal and state consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;

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the federal transparency requirements under the Physician Payments Sunshine Act, created under the ACA, which requires, among other things, certain manufacturers of drugs, devices, biologics and medical supplies reimbursed under Medicare, Medicaid, or the Children’s Health Insurance Program to annually report to CMS information related to payments and other transfers of value provided to physicians, certain other healthcare professionals, and teaching hospitals and physician ownership and investment interests, including such ownership and investment interests held by a physician’s immediate family members. Failure to submit required information may result in civil monetary penalties for all payments, transfers of value or ownership or investment interests that are not timely, accurately, and completely reported in an annual submission, and may result in liability under other federal laws or regulations. We believe that we are exempt from these reporting requirements. We cannot assure you, however, that our regulators, principally the federal government, will agree with our determination, and a determination that we have violated these laws and regulations, or a public announcement that we are being investigated for possible violations, could adversely affect our business;

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

•	state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, that may impose similar or more prohibitive restrictions, and may apply to items or services reimbursed by any non-governmental third-party payors, including private insurers; and

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federal, state and foreign laws that govern the privacy and security of health information or personally identifiable information in certain circumstances, including state health information privacy and data breach notification laws which govern the collection, use, disclosure, and protection of health-related and other personal information, many of which differ from each other in significant ways and often are not pre-empted by HIPAA, thus complicating compliance efforts.

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•	others may be able to develop and/or practice technology that is similar to our technology or aspects of our technology, but that are not covered by the claims of the patents that we own or control, assuming such patents have issued or do issue;

•	we or our licensors or any future strategic partners might not have been the first to conceive or reduce to practice the inventions covered by the issued patents or pending patent applications that we own or have exclusively licensed;

•	we or our licensors or any future strategic partners might not have been the first to file patent applications covering certain of our inventions;

•	others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;

•	it is possible that our pending patent applications will not lead to issued patents;

•	issued patents that we own or have exclusively licensed may not provide us with any competitive advantage, or may be held invalid or unenforceable, as a result of legal challenges by our competitors;

•	our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive tests for sale in our major commercial markets;

•	third parties performing manufacturing or testing for us using our products or technologies could use the intellectual property of others without obtaining a proper license;

•	parties may assert an ownership interest in our intellectual property and, if successful, such disputes may preclude us from exercising exclusive rights over that intellectual property;

•	we may not develop or in-license additional proprietary technologies that are patentable;

•	we may not be able to obtain and maintain necessary licenses on commercially reasonable terms, or at all; and

•	the patents of others may have an adverse effect on our business.

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•	we may initiate litigation or other proceedings against third parties seeking to invalidate the patents held by those third parties or to obtain a judgment that our products or technologies do not infringe those third parties’ patents;

•	we may participate at substantial cost in International Trade Commission proceedings to abate importation of products that would compete unfairly with our products or technologies;

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•	if a competitor files patent applications that claim technology also claimed by us or our licensors, we or our licensors may be required to participate in interference, derivation or opposition proceedings to determine the priority of invention, which could jeopardize our patent rights and potentially provide a third party with a dominant patent position;

•	if third parties initiate litigation claiming that our products or technologies infringe their patent or other intellectual property rights, we will need to defend against such proceedings;

•	if third parties initiate litigation or other proceedings seeking to invalidate patents owned by or licensed to us or to obtain a declaratory judgment that their products, services, or technologies do not infringe our patents or patents licensed to us, we will need to defend against such proceedings;

•	we may be subject to ownership disputes relating to intellectual property, including disputes arising from conflicting obligations of consultants or others who are involved in developing our products and technologies; and

•	if a license to necessary technology is terminated, the licensor may initiate litigation claiming that our products or technologies infringe or misappropriate its patent or other intellectual property rights and/or that we breached our obligations under the license agreement, and we would need to defend against such proceedings.

•	incur substantial monetary liability for infringement or other violations of intellectual property rights, which we may have to pay if a court decides that the diagnostic test or technology at issue infringes or violates the third party’s rights, and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the third party’s attorneys’ fees;

•	stop manufacturing, offering for sale, selling, using, importing, exporting or licensing the diagnostic test or technology incorporating the allegedly infringing technology or stop incorporating the allegedly infringing technology into such test or technology;

•	obtain from the owner of the infringed intellectual property right a license, which may require us to pay substantial upfront fees or royalties to sell or use the relevant technology and which may not be available on commercially reasonable terms, or at all;

•	redesign our products and technologies so they do not infringe or violate the third party’s intellectual property rights, which may not be possible or may require substantial monetary expenditures and time;

•	enter into cross-licenses with applicable third party, which could weaken our overall intellectual property position;

•	lose the opportunity to license our technology to others or to collect royalty payments based upon successful protection and assertion of our intellectual property against others;

•	find alternative suppliers for non-infringing technologies, which could be costly and create significant delay; or

•	relinquish rights associated with one or more of our patent claims, if our claims are held invalid or otherwise unenforceable.

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•	the scope of rights granted under the license agreement and other interpretation-related issues;

•	the extent to which our products, technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

•	the sublicensing of patent and other rights under our collaborative development relationships;

•	our diligence obligations under the license agreement and what activities satisfy those diligence obligations;

•	the inventorship and ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us and our partners; and

•	the priority of invention of patented technology.

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•	decreased demand for our current tests any tests that we may develop, and the inability to commercialize such tests;

•	injury to our reputation and significant negative media attention;

•	reluctance of experts willing to conduct our clinical studies;

•	initiation of investigations by regulators;

•	significant costs to defend the related litigation and diversion of management’s time and our resources;

•	substantial monetary awards to study subjects or patients;

•	product recalls, withdrawals or labeling, or marketing or promotional restrictions; and

•	loss of revenue.

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

•	limits in our ability to penetrate international markets if we are not able to perform tests locally;

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

•	difficulties in staffing and managing foreign operations;

•	failure to obtain regulatory approvals for the commercialization of our products in various countries;

•	complexities and difficulties in obtaining intellectual property protection and enforcing our intellectual property;

•	complexities associated with managing multiple payor reimbursement regimes, government payors, or patient self-pay systems;

•	financial risks, such as longer payment cycles, difficulty collecting accounts receivable, the impact of local and regional financial crises on demand and payment for our products 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 sales and distributors’ activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act, or FCPA, its books and records provisions, or its anti-bribery provisions.

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•	our operating performance and the performance of other similar companies;

•	our success in marketing and selling our products;

•	reimbursement determinations by third-party payors and reimbursement rates for our products;

•	changes in our projected operating results that we provide to the public, our failure to meet these projections or changes in recommendations by securities analysts that elect to follow our common stock;

•	regulatory or legal developments in the United States and other countries;

•	the level of expenses related to product development and clinical studies for our products;

•	our ability to achieve product development goals in the timeframe we announce;

•	announcements of clinical study results, regulatory developments, acquisitions, strategic alliances or significant agreements by us or by our competitors;

•	the success or failure of our efforts to acquire, license or develop additional tests;

•	recruitment or departure of key personnel;

•	the economy as a whole and market conditions in our industry;

•	trading activity by a limited number of stockholders who together beneficially own a significant percentage of our outstanding common stock;

•	the size of our market float; and

•	any other factors discussed in this Annual Report on Form 10-K.

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•	being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ disclosure;

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•	not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting;

•	not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;

•	reduced disclosure obligations regarding executive compensation; and

•	not being required to hold a non-binding advisory vote on executive compensation or obtain stockholder approval of any golden parachute payments not previously approved.

•	permit our board of directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate (including the right to approve an acquisition or other change in our control);

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•	provide that the authorized number of directors may be changed only by resolution of the board of directors;

•	provide that the board of directors or any individual director may only be removed with cause and the affirmative vote of the holders of at least 66-2/3% of the voting power of all of our then outstanding common stock;

•	provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;

•	divide our board of directors into three classes;

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

•	provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner and also specify requirements as to the form and content of a stockholder’s notice;

•	do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose);

•	provide that special meetings of our stockholders may be called only by the chairman of the board, our Chief Executive Officer or by the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors;

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provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) will be the sole and exclusive forum for the following types of actions or proceedings under Delaware statutory or common law: (i) any derivative action or proceeding brought on our behalf; (ii) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers or other employees to us or our stockholders; (iii) any action or proceeding asserting a claim against us or any of our current or former directors, officers or other employees, arising out of or pursuant to any provision of the Delaware General Corporation Law, our certificate of incorporation or our bylaws; (iv) any action or proceeding to interpret, apply, enforce or determine the validity of our certificate of incorporation or our bylaws; (v) any action or proceeding as to which the Delaware General Corporation Law confers jurisdiction to the Court of Chancery of the State of Delaware; and (vi) any action asserting a claim against us or any of our directors, officers or other employees governed by the internal affairs doctrine, in all cases to the fullest extent permitted by law and subject to the court’s having personal jurisdiction over the indispensable parties named as defendants; provided these provisions of our amended and restated certificate of incorporation and amended and restated bylaws will not apply to suits brought to enforce a duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction; and

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provide that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act, subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such exclusive forum provision.

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•	execute clinical studies to generate evidence supporting our current and future product candidates;

•	execute our commercialization strategy for our current and future products;

•	continue our ongoing and planned development of new products;

•	seek to discover and develop additional product candidates;

•	hire additional scientific and research and development staff; and

•	add additional operational, financial and management information systems and personnel.

•	Report volume. We believe that the number of reports we deliver to physicians is an important indicator of growth of adoption among the healthcare provider community. Our revenue and costs are affected by the volume of testing and mix of customers. Our performance depends on our ability to retain and broaden adoption with existing prescribing physicians, as well as attract new physicians.

•	Reimbursement. We believe that expanding reimbursement is an important indicator of the value of our products. Payors require extensive evidence of clinical utility, clinical validity, patient outcomes and health economic benefits in order to provide reimbursement for diagnostic products. Our revenue depends on our ability to demonstrate the value of our products to these payors.

•	Gross margin. We believe that our gross margin is an important indicator of the operating performance of our business. Higher gross margins reflect the average selling price of our tests, as well as the operating efficiency of our laboratory operations.

•	New product development. A significant aspect of our business is our investment in research and development activities, including activities related to the development of new products. In addition to the development of new product candidates, we believe these studies are critical to gaining physician adoption of new products and driving favorable coverage decisions by payors for such products.

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•	successful commencement and completion of clinical study protocols;

•	successful identification and acquisition of tissue samples;

•	the development and validation of genomic classifiers; and

•	acceptance of new genomic tests by physicians, patients and third-party payors.

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•

Expected term. The expected term is the period of time that granted options are expected to be outstanding. For stock options, we have set the expected term using the simplified method based on the weighted average of both the period to vesting and the period to maturity for each option, as we have concluded that our stock option exercise history does not provide a reasonable basis upon which to estimate the expected term. For the ESPP, the expected term is the period of time from the offering date to the purchase date.

•	Expected volatility. Because of the limited period of time our stock has been traded in an active market, we calculate volatility by using the historical stock prices of a group of similar companies looking back over the estimated life of the option or the ESPP purchase right and averaging the volatilities of these companies.

•	Risk-free interest rate. We base the risk-free interest rate used in the Black-Scholes valuation model on the market yield in effect at the time of option grant and at the offering date for ESPP provided from the Federal Reserve Board’s Statistical Releases and historical publications from the Treasury constant maturities rates for the equivalent remaining terms.

•	Dividend yield. We have not paid, and do not have plans to pay, cash dividends. Therefore, we use an expected dividend yield of zero in the Black-Scholes option valuation model.

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•	Hired a full-time director of SEC reporting and technical accounting, a certified public accountant with an active license, with public company reporting experience to provide oversight and technical expertise with respect to

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•	Began enhancement of our information technology tools to improve the efficiency of our processes with respect to revenue recognition under ASC 606;

•	Engaged a third-party consultant to assist us with formalizing our internal control documentation and implementation of enhancements to our internal control over financial reporting; and

•	Designed and implemented a new process control and review procedure with respect to manual journal entries.

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*	Filed herewith

**	Furnished herewith.

+	Indicates management contract or compensatory plan.

#	Certain portions of this exhibit (indicated by “[***]”) have been omitted as we have determined (i) the omitted information is not material and (ii) the omitted information would likely cause harm to us if publicly disclosed.

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(1)

For the year ended December 31, 2019, reflects the assumed conversion of the Q1 2019 Notes (as defined in Note 7) into shares of common stock beginning July 1, 2019, in accordance with the requirements in ASC 260, Earnings per Share, for contingently issuable shares due to the contingency not being met until the third quarter of 2019. The July 2019 Note (as defined in Note 7), was excluded from the computation of diluted earnings (loss) per share prior to its conversion on July 29, 2019 in connection with the IPO, as disclosed below.

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(1)	Associated with the July 2019 Note.

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(1)

Vested and exercisable options. Additionally, outstanding unvested options to purchase an aggregate of 126,044 shares of common stock with a weighted-average exercise price of $2.39 per share may be exercised prior to vesting as of December 31, 2019 under early-exercise provisions. In the event of such exercise, the shares obtained upon exercise would be restricted and subject to forfeiture prior to vesting. No such early exercises have occurred as of December 31, 2019.

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•

Expected term. The expected term is the period of time that granted options are expected to be outstanding. For stock options, the Company has set the expected term using the simplified method based on the weighted average of both the period to vesting and the period to maturity for each option, as the Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate the expected term. For the ESPP, the expected term is the period of time from the offering date to the purchase date.

•	Expected volatility. Because of the limited period of time the Company’s stock has been traded in an active market, the Company calculates volatility by using the historical stock price volatility of a group of similar companies looking back over the estimated life of the option or the ESPP purchase right and averaging the volatilities of these companies.

•	Risk-free interest rate. The Company bases the risk-free interest rate used in the Black-Scholes valuation model on the market yield in effect at the time of option grant and at the offering date for the ESPP, provided from the Federal Reserve Board’s Statistical Releases and historical publications from the Treasury constant maturities rates for the equivalent remaining terms.

•	Dividend yield. The Company has not paid, and does not have plans to pay, cash dividends. Therefore, the Company use an expected dividend yield of zero in the Black-Scholes option valuation model.

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(2)	For the fourth quarter of 2018, includes revenue recognized of (in thousands) $5,191 for tests delivered during the first three quarters of 2018 for which the requirements to release the constraint on variable consideration were not met until the fourth quarter of 2018 in connection with the issuance of the LCD for DecisionDx-Melanoma and establishment of a Medicare reimbursement rate.

(3)	Basic and diluted earnings (loss) per share are computed independently for each quarterly and annual period presented. Therefore, the sum of the quarterly basic and diluted earnings (loss) per share amounts may not equal annual basic and diluted earnings (loss) per share.

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