BIOCEPT INC Management report and analysis of the financial situation and operating results. (Form 10-K)

The following discussion of our financial condition and results of operations
should be read together with our financial statements and related notes included
elsewhere in the Annual Report. This discussion contains forward-looking
statements based upon our current plans, estimates, beliefs and expectations
that involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including those set forth under the sections entitled
"Risk Factors," "Special Note Regarding Forward-Looking Statements" and
elsewhere in this Annual Report.

We are a molecular oncology diagnostics company that develops and commercializes
proprietary clinical diagnostic laboratory assays designed to identify rare
tumor cells and cell-free tumor DNA from blood and cerebrospinal fluid, or
CSF. The identification of tumor cells and cell-free tumor DNA in CSF has become
our principal development focus following our early commercial expansion into
CSF in 2020. This product was branded and trademarked as CNSideTM in April
2021.

The identification of circulating tumor cells, or CTCs, and circulating
cell-free tumor DNA and RNA, or ctDNA and ctRNA, deriving from solid tumors such
as breast cancer or lung cancer using a standard blood sample has been described
as a "liquid biopsy." This term reflects the ease with which peripheral blood
can be drawn compared to performing a surgical biopsy, but this technology is
not limited to a peripheral blood approach.

In January 2020, we adapted and validated our proprietary blood-based liquid
biopsy technology for commercial and clinical research use in CSF to identify
tumor cells that have metastasized to the central nervous system, or CNS, in
patients with advanced lung cancer or breast cancer. CNSide has been designed to
improve the clinical management of patients with suspected metastatic cancer
involving the CNS by enabling the quantitative analysis and molecular
characterization of tumor cells and ctDNA and ctRNA in the CSF. Since then, we
have worked extensively with leading neuro-oncologists and other cancer experts
to further define and characterize the use of this unique assay.

Our efforts have culminated in the presentation of our early clinical experience
at several leading academic forums, including most recently the Society of
Neuro-Oncology, or SNO, Brain Metastases meeting in August 2021, as well as the
Annual Society of Neuro-Oncology meeting in November 2021 and the San Antonio
Breast Cancer Symposium, or SABCS, in December 2021. We believe these
presentations have illustrated the feasibility of this assay to inform three
critical questions important for the care of patients with suspected or
confirmed metastatic cancer involving the CNS: Is there tumor (diagnosis)? Is
there target (presence of a biomarker to aid treatment selection)? Is there
trend (a response to therapy)?

The question "Is there tumor?" is essential for the diagnostic work-up of these
patients. Tumor cells in the blood can shed from either primary or metastatic
tumors. They can be rapidly removed in the capillary beds of the spleen, liver,
kidneys, lungs and other organs, so they are rarely found. They are the defining
feature of metastasis to the leptomeningeal space within the CNS and hence
define the presence or absence of leptomeningeal metastasis, or LM. To
distinguish tumor cells derived from CSF and blood we often refer to tumor cells
in CSF as CSF Tumor Cells, or CSFTCs, rather than CTCs.

Regarding the second clinical question, "Is there target?" our CNSide assay
provides a vehicle for several different diagnostic assay profiles which
combined with our molecular test menu can identify tumor cell biomarkers that
are intended to help physicians make decisions related to the evolution or
course of metastatic tumor that may inform treatment decisions. Cancer cells
typically acquire genetic alterations which differ from that of normal
cells. Metastatic cancers often acquire additional genetic alterations which
distinguish them from the primary tumor site. This marked genetic variation
between areas of tumor growth is termed "genetic heterogeneity," and findings
related to this were featured in our SABCS presentation in December 2021
illustrating the value of CNSide in identifying "genetic heterogeneity" of a
targetable biomarker called HER2.

Finally, regarding the third clinical question, "Is there trend?" over the past
year we have gained considerable experience with cases that had been sampled
multiple times over the course of a patient's treatment. The association of
quantitative CSF tumor cell counts with response to treatment has been noted in
both lung and breast cancer, as well as other tumors examined. In August 2021,
at the SNO Brain Metastases meeting, we presented data obtained from a single
institution experience showing how serial monitoring of CSFTCs by CNSide was
used to determine the response to treatment in patients with Non-Small Cell Lung
Cancer having LM. In addition, in November 2021 at SNO, we presented the early
findings of several patients with breast cancer having LM which had been
followed with multiple CSF samples drawn at different time points on each
patient. The downward progression of tumor cell counts has been noted by several
treating physicians to correlate with response to treatment and resolution of
symptoms. Serial monitoring of genetic alterations present in CSF tumor cells
may create

                                       74
--------------------------------------------------------------------------------
opportunities to change the therapy of certain patients throughout
treatment. These observations presented in abstracts and poster presentations in
2021 have informed our clinical study strategy which is the basis for our 2022
efforts to further explore these observations in a prospective clinical trial.

Summary of the response to the COVID-19 pandemic

In June 2020, to respond to a national public health emergency precipitated by
the COVID-19 pandemic, we introduced molecular testing for SARS-CoV2, the virus
responsible for COVID-19, using a United States Food and Drug
Administration, Emergency Use Authorization, based "RT-PCR" method developed by
Thermo-Fisher.

In November 2021, we launched a combined COVID-19/Influenza A/Influenza B assay
manufactured by Thermo-Fisher which broadened our assay menu to meet the rising
demand related to winter testing with emergence of new COVID-19 variants such as
Delta (summer 2021) and Omicron (fall/winter 2021-22).

Since launch of our COVID-19 testing program, we have performed more than
800,000 assays for customers. We have primarily marketed our COVID-19 testing
services to skilled nursing facilities in the western United States and also to
certain community colleges within California.

Our COVID-19 testing services were responsible for most of our revenues during
2020 and 2021. However, as a result of increased vaccination and immunization
levels, as well as decreased COVID-19 hospitalizations, reported cases and
mandatory COVID-19 testing, we are currently seeing reduced demand for our
COVID-19 testing services and expect this trend to continue absent a negative
and sustained turn in the course of the pandemic.

Additional Oncology Testing Services

In addition to CNSide, our current blood-based testing includes our Target
SelectorTM technologies which enable detection of specific gene mutations, such
as EGFR, KRAS or BRAF, in cell-free ctDNA from blood samples, as well as
specific protein and gene alterations, such as HER2 amplification, in CTCs
isolated from blood. We believe our multi-modality combination of a proprietary
cell capture and analysis method with a proprietary ctDNA approach provides both
high-sensitivity and specificity and is applicable to a broad range of
diagnostic applications in patients with metastatic carcinoma.

In January 2019, we began offering research use only, or RUO, liquid biopsy kits
containing our patented and proprietary ctDNA Target Selector molecular
(PCR-based) testing for certain specific cancer genes to laboratories and
researchers worldwide. In March 2020, we released an update for our RUO EGFR
Target Selector Kit which expanded the sample types validated to include both
blood and CSF. In March 2020, we also released a RUO BRAF Target Selector
assay validated for ctDNA.

At our corporate headquarters facility located in San Diego, California, we
operate a clinical laboratory that is CLIA-certified, CAP accredited and
licensed by the California Department of Public Health. In this facility we also
develop novel assays that are part of our project pipeline for future commercial
launch and we manufacture our microfluidic channels and various assay reagents
and products used in our testing processes. We also work closely with external
manufacturers to outsource certain products such as collection tubes and to
manufacture items that we intend to use in the near future to reduce costs and
improve efficiency.

The assays we offer and intend to offer are classified as CLIA laboratory
developed tests, or LDTs, under CLIA regulations. CLIA certification and state
licensure in California and certain other states under the supervision of a
qualified laboratory medical director is required before any clinical
laboratory, including ours, may perform testing on human specimens for the
purpose of obtaining information for the diagnosis, prevention, or treatment of
disease or the assessment of health. In addition, we participate in and have
received CAP accreditation, which includes rigorous bi-annual laboratory
inspections and requires adherence to specific quality standards.

Commercial strategy

Our primary sales strategy is to engage neuro-oncologists, oncologists and other
physicians in the United States at private and group practices, hospitals,
laboratories and cancer centers to educate them about our unique products and
services. In addition,

                                       75
--------------------------------------------------------------------------------
we market our clinical trial and research services to pharmaceutical and
biopharmaceutical companies and clinical research organizations. We also market
and sell molecular assay kits which enable laboratories other than Biocept to
perform our testing in house. Sales of these kits began in the first quarter of
2019. Further, sales to laboratory supply distributors of our proprietary
specimen collection tubes, or SCTs, commenced in June 2018, which allow for the
intact transport of liquid biopsy samples for research use only from regions
around the world.

.Our revenue generation efforts are concentrated in the following areas:

• provide laboratory services to neuro-oncologists, oncologists and others

         physicians or healthcare providers treating patients with cancer who use
         the biomarker information we provide in order to determine the best
         treatment plan for their patients;

• provide laboratory services using both our CTC and ctDNA and ctRNA

assays to help pharmaceutical and biopharmaceutical companies

         run clinical studies establishing the use of novel drug therapies used to
         treat cancer;


      •  licensing our proprietary technology and selling our distributed
         products, including our SCTs and assay kits, to partners in the United
         States and abroad; and


  • Performing COVID-19 testing.


We plan to grow our business by directly offering our CNSide and Target Selector
liquid biopsy CTC and molecular assays to neuro-oncologists, oncologists and
other physicians or heath care providers who treat patients with cancer. Based
on our product development data, as well as discussions with our key
collaborators, we believe that our planned future assays, particularly those
related to CSF, should provide important information and clinical value to
physicians.

We believe our ability to rapidly translate insights about the utility of
cytogenetic, immunocytochemical and molecular biomarkers to provide information
to neuro-oncologists, oncologists and other physicians for treatment decisions
in the clinical setting will improve patient treatment and management, and that
these assays will become a key component of the standard of care for
personalized cancer treatment.

Key Factors Affecting Our Results of Operations and Financial Condition

Our overall long-term growth plan depends on our ability to continue to develop
and commercialize products and assays through our CLIA-certified,
CAP-accredited, and state-licensed laboratory. We have commercialized our Target
Selector assays for breast cancer, non-small cell lung cancer, or NSCLC, gastric
cancer, colorectal cancer, prostate cancer, pancreaticobiliary cancer, and
ovarian cancer, and plan to continue to launch a series of cancer diagnostic
assays for different predictive biomarkers assays in the United States as LDTs
performed in our laboratory and enhance revenue for these products through the
efforts of our sales and marketing organization. Our sales strategy is to engage
medical oncologists, neuro-oncologists, surgical oncologists, urologists,
pulmonologists, pathologists and other physicians in the United States at
private and group practices, hospitals and cancer centers. We also plan to
continue to evaluate potential opportunities for the commercialization of our
products and assays in other countries. Additionally, sales of our proprietary
SCTs which allow for the intact transport of liquid biopsy samples for research
use only, or RUO, from regions around the world, commenced during 2018. In
addition to testing for physicians and their patients, we offer clinical trials
testing and research services to help increase the efficiency and economic
viability of clinical trials for pharmaceutical and biopharmaceutical companies
and clinical research organizations both within and outside of the United
States. We are currently exploring the possibility of introducing ctDNA
technology outside the United States as part of IVD test kits and/or testing
systems utilizing our Target Selector technologies. We plan to continue to
cooperate with partners on accessing markets internationally either through
partnerships with local groups and distributors or through the development of
IVDs and/or test systems, including instrumentation. We also have a research and
development program focused on technology enhancements, novel platform
development, and evaluating clinical applications for our cancer diagnostic
tests in different cancer types and clinical settings.

To facilitate market adoption of our products and assays, we anticipate having
to successfully complete additional clinical utility studies with clinical
samples to generate clinical utility data and then publish our results in
peer-reviewed scientific journals. Our ability to complete such clinical studies
is dependent upon our ability to leverage our collaborative relationships with
leading institutions to facilitate our research, to conduct the appropriate
clinical studies and to obtain favorable clinical data. We currently collaborate
with key thought leaders, physicians and clinical researchers across the
country, including those at Sarah Cannon Research Institute, University of
Colorado, Northwestern University Lurie Cancer Center, Stanford

                                       76
--------------------------------------------------------------------------------
University, Penn State University, University of California, San Diego, St
John's Cancer Institute at Santa Monica (formerly John Wayne Cancer Institute),
Columbia University, Emory University, Johns Hopkins Medical Institute,
University of Texas Southwestern Medical Center, Yale University, Ohio State
University, Vanderbilt University, Georgetown University and many others and
plan to expand our collaborative relationships to include other key thought
leaders at other institutions for the cancer types we target with our Target
Selector commercialized assays and our planned future assays, as well as for our
current and planned future products. Such relationships help us develop and
validate the effectiveness and utility of our products, commercialized assays
and our planned future assays in specific, clinical settings and provide us
access to patient samples and data.

We believe that the factors discussed in the following paragraphs have had and
are expected to continue to have a material impact on our results of operations
and financial condition.

Revenues

The Company's commercial revenues are generated from diagnostic services
provided to patient's physicians and billed to third-party insurance payers such
as managed care organizations, Medicare and Medicaid and patients for any
deductibles, coinsurance or copayments that may be due. The Company recognizes
revenue in accordance with Accounting Standards Code 606, Revenue from Contracts
with Customers, or ASC 606, which requires that an entity recognize revenue when
it transfers promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled to in exchange for
those goods or services.

We bill third-party payers on a fee-for-service basis at our list price and
third-party commercial revenue is recorded net of contractual discounts,
payer-specific allowances and other reserves. Our development services revenues
are supported by contractual agreements and generated from assay development
services provided to entities, as well as certain other diagnostic services
provided to physicians. Diagnostic services are completed upon the delivery of
assay results to the prescribing physician, at which time we bill for the
service.

Our gross commercial revenues billed are subject to estimated deductions for
such contractual discounts, payer-specific allowances and other reserves to
arrive at reported net revenues, which relate to differences between amounts
billed and corresponding amounts estimated to be subsequently collected. These
third-party payer discounts and sales allowances are estimated based on a number
of assumptions and factors, including historical payment trends, seasonality
associated with the annual reset of patient deductible limits on January 1 of
each year, and current and estimated future payments. The estimates of amounts
that will ultimately be realized from commercial diagnostic services require
significant judgment by us. Patients do not enter into direct agreements with us
that commit them to pay any portion of the cost of the tests in the event that
they have not met their annual deductible limit under their insurance policy, if
any, or if their insurance otherwise declines to reimburse us. Adjustments to
the estimated payment amounts are recorded at the time of final collection and
settlement of each transaction as an adjustment to commercial revenue.

Costs and expenses

We classify our costs and expenses into four categories: cost of revenues,
research and development, sales and marketing, and general and administrative.
Our costs and expenses principally consist of facility costs and overhead,
personnel costs, outside services and consulting costs, laboratory consumables,
development costs, and legal fees.

Cost of Revenues. Our cost of revenues consists principally of facility costs
and overhead, personnel costs, and laboratory and manufacturing supplies and
materials. We are pursuing various strategies to reduce and control our cost of
revenues, including automating aspects of our processes, developing more
efficient technology and methods, and attempting to negotiate improved terms and
volume discounts with our suppliers.

Research and Development Expenses. We incur research and development expenses
principally in connection with our efforts to develop and improve our tests. Our
primary research and development expenses consist of direct personnel costs,
laboratory equipment and consumables, and overhead expenses. We anticipate that
research and development expenses will increase in the near-term, principally to
develop and validate tests in our pipeline and to perform work associated with
clinical utility studies and development collaborations. In addition, we expect
that our costs related to collaborations with research and academic institutions
will increase. All research and development expenses are charged to operations
in the periods in which they are incurred.

                                       77
--------------------------------------------------------------------------------
Sales and Marketing Expenses. Our sales and marketing expenses consist
principally of personnel and related overhead costs for our sales team and their
support personnel, travel and entertainment expenses, and other selling costs
including sales collaterals and trade shows. We anticipate sales and marketing
expenses to increase as we work on generating higher revenues and marketing
additional offerings.

General and Administrative Expenses. General and administrative expenses consist
principally of personnel-related expenses, professional fees, such as legal,
accounting and business consultants, insurance costs, and other general
expenses. We expect that our general and administrative expenses will increase
as we expand our business operations. We further expect that general and
administrative expenses will increase due to increased information technology,
legal, insurance, accounting and financial reporting expenses associated with
expanded commercial activities.

Critical Accounting Policies and Significant Judgments and Estimates

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. While we believe these estimates are reasonable and
consistent, they are by their very nature estimates of amounts that will depend
on future events. Accordingly, actual results could differ from these estimates.
Our Audit Committee periodically reviews our significant accounting policies.
Our critical accounting policies arise in conjunction with the following:
• revenue recognition;


• stock-based compensation; and

• going concern.




Revenue Recognition

We initiate a revenue transaction when we receive a requisition order to perform
a diagnostic test. The information provided on the requisition form is used to
determine the party that will be billed for the testing performed and the
expected reimbursement. We recognize revenue and satisfy our performance
obligation for services rendered when the testing process is complete, and
associated results are reported. Revenues flow from clients, patients, Medicare
and Medicaid and other third-party payers. We consider negotiated discounts and
anticipated adjustments, including historical collection experience for the
payer portfolio, when revenues are recorded.

Here are the descriptions of our payers:

Clients

Client payers represent the portion of revenue related to physicians, hospitals,
health systems, accountable care organizations, employers and other entities
where payment is received exclusively from the entity ordering the testing
service.

The patients

Patient revenues include revenue from uninsured patients and member cost-share
for insured patients (e.g., coinsurance, deductibles and non-covered services).
Uninsured patients are billed based upon our fee schedules. We bill insured
patients as directed by their health plan and after consideration of the fees
and terms associated with an established health plan contract.

Medicare and Medicaid

Medicare and Medicaid revenues are received from traditional Medicare and
Medicaid programs. Net revenue from these programs is based on the fee schedule
established by the related government authority. In addition, other adjustments
including anticipated payer denials are considered when determining net revenue.
Any remaining adjustments to revenue are recorded at the time of final
collection and settlement. These adjustments are not material to our results of
operations in any period presented.





                                       78
--------------------------------------------------------------------------------


Third Party

Third party includes revenue related to insurance companies. Most of our
third-party revenue is reimbursed on a fee-for-service basis. These payers are
billed based on our established list price and revenue is recorded net of
contractual discounts. Revenues are recorded based upon contractually negotiated
fee schedules, with revenues for non-contracted managed care organizations
recorded based on historical reimbursement experience.

Revenue recognition and associated reserves

Our commercial revenues are generated from diagnostic services provided to
patient's physicians and billed to third-party insurance payers such as managed
care organizations, Medicare and Medicaid and patients for any deductibles,
coinsurance or copayments that may be due. We recognize revenue in accordance
with ASC 606, Revenue from Contracts with Customers, or ASC 606, which requires
that an entity recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the entity
expects to be entitled to in exchange for those goods or services.

Contracts

For our commercial revenues, while we market directly to physicians, our
customer is the patient. Patients do not enter into direct agreements with us,
however, a patient's insurance coverage requirements would dictate whether or
not any portion of the cost of the tests would be patient responsibility.
Accordingly, we establish a contract with a commercial patient in accordance
with other customary business practices, as follows:

• Approval of a contract is established by the order and membership, which are

submitted by the patient’s physician.

• We are obligated to perform our diagnostic services upon receipt of a sample

of a physician, and the patient and/or applicable payor are required to

reimburse us for services rendered based on the patient’s insurance benefits.

• Payment terms are based on the patient’s existing insurance benefits,

including the impact of hedging decisions with CMS and applicable

the reimbursement contracts between us and the payers, unless the patient

is a self-paid patient, we bill the patient directly after the

services are provided.

• Once we have provided a patient’s test result to the prescribing physician, the

contract with a patient has commercial substance, as we are legally able to

collect payment and bill an insurer and/or a patient, regardless of the payer

contract status or health insurance benefit status.

• The consideration associated with commercial income is considered variable and

constrained until fully auctioned, with net revenues recorded to the extent that

that it is likely that a significant reversal will not occur.

Our development services revenue is supported by contractual agreements and generated from assay development services provided to entities, as well as certain other diagnostic services provided to physicians, and revenue is recognized upon delivery of performance obligations in the contract.

Performance bonds

A performance obligation is a promise in a contract to transfer a distinct good
or service, or a bundle of goods or services, to the customer. For commercial
and development services revenues, our contracts have a single performance
obligation, which is satisfied upon rendering of services, which culminates in
the delivery of a patient's assay result(s) to the ordering physician or
entity. The duration of time between test order receipt and delivery of a valid
assay result to the ordering physician or entity is typically less than two
weeks, and for our RT-PCR COVID-19 testing, typically 48 hours or less.
Accordingly, we elected the practical expedient and therefore, we do not
disclose the value of unsatisfied performance obligations.

Transaction price

The transaction price is the amount of consideration that we expect to collect
in exchange for transferring promised goods or services to a customer, excluding
amounts collected on behalf of third parties, such as sales taxes. The
consideration expected from a contract with a customer may include fixed
amounts, variable amounts, or both. Our gross commercial revenues billed, and
corresponding gross accounts receivable, are subject to estimated deductions for
such allowances and reserves to arrive at reported net revenues, which relate to
differences between amounts billed and corresponding amounts estimated to be
subsequently collected and is deemed to be variable although the variability is
not explicitly stated in any contract. Rather, the implied variability is due to
several factors, such as the payment history or lack thereof for third-party
payers, reimbursement rate changes for contracted and non-contracted payers, any
patient co-payments, deductibles or compliance incentives, the

                                       79
--------------------------------------------------------------------------------
existence of secondary payers and claim denials. We estimate the amount of
variable consideration using the most likely amount approach to estimating
variable consideration for third-party payers, including direct patient bills,
whereby the estimated reimbursement for services are established by payment
histories on CPT codes for each payer, or similar payer types. When no payment
history is available, the value of the account is estimated at Medicare rates,
with additional other payer-specific reserves taken as appropriate. Collection
periods for billings on commercial revenues range from less than 30 days to
several months, depending on the contracted or non-contracted nature of the
payer, among other variables. The estimates of amounts that will ultimately be
realized from commercial diagnostic services for non-contracted payers require
significant judgment by management.

We limit the amount of variable consideration included in the transaction price
to the unconstrained portion of such consideration. Revenue is recognized up to
the amount of variable consideration that is not subject to a significant
reversal until additional information is obtained or the uncertainty associated
with the additional payments or refunds is subsequently resolved. Differences
between original estimates and subsequent revisions, including final
settlements, represent changes in the estimate of variable consideration and are
included in the period in which such revisions are made. We monitor our
estimates of transaction price to depict conditions that exist at each reporting
date. If we subsequently determine that we will collect more than we originally
estimated for a contract with a customer, we will account for the change as an
increase in the estimate of the transaction price in the period identified as an
increase to revenue. Similarly, if we subsequently determine that the amount we
expect to collect from a customer is less than originally estimated, we will
generally account for the change as a decrease in the estimate of the
transaction price in the period identified as a decrease to revenue, provided
that such downward adjustment does not result in a significant reversal of
cumulative revenue recognized. Revenue recognized from changes in transaction
prices was not significant during the year ended December 31, 2020, however,
transaction prices decreased 18% for the year ended December 31, 2021 due to a
decline in COVID-19 reimbursement rates. Further, although the Company believes
that its estimate for contractual allowances and other reserves is appropriate,
it is possible that the Company will experience an impact on cash collections as
a result of the impact of the COVID-19 pandemic.

Assign the transaction price

For our commercial revenues, the entire transaction price is allocated to the
single performance obligation contained in a contract with a customer. For our
development services revenues, the contracted transaction price is allocated to
each single performance obligation contained in a contract with a customer as
performed.

Point-in-time Recognition

Our single performance obligation is satisfied at a point in time, and that
point in time is defined as the date a patient's successful assay result is
delivered to the patient's ordering physician or entity. We consider this date
to be the time at which the patient obtains control of the promised diagnostic
assay service.

Contract Balances

The timing of revenue recognition, billings and cash collections results in
accounts receivable recorded in our balance sheets. Generally, billing occurs
subsequent to delivery of a patient's test result to the ordering physician or
entity, resulting in an account receivable.

Practical expedients

We do not adjust the transaction price for the effects of a large financing component because at the start of the contract we expect the collection cycle to be one year or less.

We expense sales commissions when incurred because the amortization period is one year or less, which are recorded in selling and marketing expenses.

We incur certain other costs that are incurred regardless of whether a contract
is obtained. Such costs are primarily related to legal services and patient
communications. These costs are expensed as incurred and recorded within general
and administrative expenses.

                                       80

————————————————– ——————————

Stock-based compensation

We account for stock-based compensation under the provisions of ASC 718,
Compensation-Stock Compensation, which requires the measurement and recognition
of compensation expense for all stock-based awards made to employees and
directors based on estimated fair values on the grant date. We estimate the fair
value of stock option awards on the date of grant using the Black-Scholes option
pricing model, or Black-Scholes valuation model. The fair value of RSUs is
determined by the price of our common stock on the date of grant. The value of
the portion of the award that is ultimately expected to vest is recognized as
expense over the requisite service periods using the straight-line method. We
estimate forfeitures at the time of grant and revise our estimates in subsequent
periods if actual forfeitures differ from those estimates.

Continuity of exploitation

We assess and determine our ability to continue as a going concern under the
provisions of ASC Topic 205-40, Presentation of Financial Statements-Going
Concern, which requires us to evaluate whether there are conditions or events
that raise substantial doubt about our ability to continue as a going concern
within one year after the date that our annual and interim financial statements
are issued. Certain additional financial statement disclosures are required if
such conditions or events are identified. If and when an entity's liquidation
becomes imminent, financial statements should be prepared under the liquidation
basis of accounting.

Determining the extent, if any, to which conditions or events raise substantial
doubt about our ability to continue as a going concern, or the extent to which
mitigating plans sufficiently alleviate any such substantial doubt, as well as
whether or not liquidation is imminent, requires significant judgment by us. We
have determined that it is not probable based on projected cash flows that
substantial doubt about the Company's ability to continue as a going concern
exists for the one-year period following the date that the financial statements
for the year ended December 31, 2021 were issued.

Covid-19 pandemic

The COVID-19 pandemic continues to evolve, and the extent to which COVID-19 may
impact our business will depend on future developments, which are highly
uncertain and cannot be predicted with confidence, such as the ultimate
geographic spread of the disease, the duration of any outbreaks, travel
restrictions and social distancing in the United States and other countries,
government-funding for COVID-19 testing, business closures or business
disruptions, and the effectiveness of actions taken in the United States and
other countries to contain and treat the disease. We estimate that the COVID-19
pandemic led to an approximate 15% to 25% decline in commercial volume from
current customers for the year ended December 31, 2020, and also impacted
opportunities for us to gain new customers with the closing of many physician
offices and labs. For the year ended December 31, 2021, the volume of our
oncology business was reduced by approximately 3% from the previous year. We are
continuing to vigilantly monitor the situation with our primary focus on the
health and safety of our employees and clients.

In April 2020, we announced that we validated a COVID-19 molecular diagnostic
test and that we would begin accepting physician-ordered testing requests. The
testing volume was initially limited by the national shortage of specimen
collection kits. In June 2020, we announced the availability of 10,000 specimen
collection kits for COVID-19 testing for physician ordering. Collected specimens
are shipped to our high-complexity, CLIA-certified, CAP-accredited and BSL-2
safety level laboratory in San Diego with results returned to ordering
physicians in an estimated 24 to 48 hours. We have received more than 800,000
samples for processing through our RT-PCR technology at our laboratory to date.
We are currently seeing reduced demand for our COVID-19 testing services and
expect this trend to continue absent a negative and sustained turn in the course
of the pandemic.

                                       81

————————————————– ——————————

Operating results

Completed exercises December 31, 2020 and 2021

The following table sets forth certain information regarding our results of operations for the periods indicated (in thousands):

                                              For the years ended                 Change
                                                 December 31,
                                              2020           2021            $              %
Net revenues                               $    27,461     $  61,249     $  33,788        123%
Costs and expenses:
Cost of revenues                                21,337        37,764        16,427         77%
Research and development expenses                5,220         4,960          (260 )      (5%)
General and administrative expenses              9,973        12,614         2,641         26%
Sales and marketing expenses                     6,400         8,320         1,920         30%
Total costs and expenses                        42,930        63,658        20,728         48%
Loss from operations                           (15,469 )      (2,409 )      13,060        (84%)
Other income/(expense):
Interest expense, net                             (236 )        (290 )         (54 )       23%
Warrant inducement expense                      (2,102 )           -         2,102          *
Total other income/(expense):                   (2,338 )        (290 )       2,048        (88%)
Loss before income taxes                       (17,807 )      (2,699 )      15,108        (85%)
Income tax expense                                   -          (125 )        (125 )        *
Net loss and comprehensive loss                (17,807 )      (2,824 )      14,983        (84%)
Deemed dividend related to warrants down            (3 )           0             3          *
round provision
Net loss attributable to common            $   (17,810 )   $  (2,824 )   $  14,986        (84%)
shareholders


__________

* Not meaningful.

                                       82
--------------------------------------------------------------------------------

Net income

Net revenues were approximately $61.2 million for the year ended December 31,
2021, compared with approximately $27.5 million for the year ended December 31,
2020. The composition of our net revenues recognized during the years ended
December 31, 2021 and 2020, disaggregated by source and upon delivery, are as
follows (in thousands):


                                               For the year ended December 31,
                                                 2020                  2021            Change            %

Net income from non-contract payers $12,793 $25,671 $12,878 101% Net Payer Revenue Under Contract*

                 14,070                

35,260 21,190 151%

                  Net commercial revenues            26,863                60,931       34,068         127%
Development services revenues                           177                   147          (30 )       (17%)
Kits and Specimen Collection Tubes (SCTs)               421                   171         (250 )       (59%)
Total net revenues                          $        27,461       $        61,249     $ 33,788         123%

*Includes Medicare and Medicare Advantage as reimbursements are fixed.



The 127% increase in net commercial revenues was attributable to overall
accession volumes related to significant RT-PCR COVID-19 testing that was
launched during the second quarter of 2020 and continued through 2021. Total
commercial accessions delivered for the years ended December 31, 2021 and 2020
were 532,520 and 191,461, respectively, of which 528,917 and 187,764,
respectively, were related to RT-PCR COVID-19 testing.

Estimated revenue per commercial accession delivered during the year ended
December 31, 2021 was $115 per commercial accession delivered while during the
year ended December 31, 2020 it was approximately $140 per commercial accession
delivered. The decrease in revenue per commercial accession delivered, as
compared to the prior year, is primarily the result of lower reimbursement rates
related to our RT-PCR COVID-19 testing. Approximately 57% of our contracted
payers reduced their reimbursement rates and we increased our accounts
receivable reserves by approximately $7.2 million for the year ended December
31, 2021.

The following table presents certain information concerning commercial accession files and development services delivered during the financial years ended
December 31, 2021 and 2020, as follows:

                                        Year ended December 31,             

Change

                                          2020             2021          # / $            %

# Commercial inputs delivered 191,461,532,520,341,059 $178% Estimated value per salesperson $140 $115 $

 (25 )      (18%)
accession delivered



                                             Year ended                       Change
                                            December 31,
                                                2020            2021          # / $             %
# Development services cases delivered                459           468              9         2%
$ Value estimated per development          $          386     $     314                       (19%)
accession delivered                                                         $      (72 )


Development revenues remained relatively flat as the development services cases
delivered only increased by 9 cases for the year ended December 31, 2021 and the
revenue per development services accession did not increase compared to the same
period in the prior year. Kits and SCT revenues decreased by approximately $0.3
million for the year ended December 31, 2021, which includes product
distribution of Target Selector RUO kits, CEE-Sure® SCTs and research and
development reimbursement revenues. Approximately $0.1 million of the decrease
is due to our completing a co-development contract with Aegea which was focused
on developing a highly sensitive PCR-based assay designed by Aegea for detecting
the COVID-19 virus and the remaining variance is due to a decrease in the Target
Selector RUO and molecular assay kits to research and development customers as a
result of the customers completing their research and development projects.

                                       83

————————————————– ——————————

Costs and expenses

Cost of Revenues. Cost of revenues was approximately $37.8 million for the year
ended December 31, 2021, compared with approximately $21.3 million for the year
ended December 31, 2020, representing an increase of approximately $16.4 million
or 77% primarily resulting from increased revenues related to our RT-PCR
COVID-19 testing business. Although we continue to leverage the fixed components
of our costs, our cost of revenue as a percentage of net revenues decreased by
approximately 21% for the year ended December 31, 2021 as compared to the same
period in the prior year. The overall increase was primarily due to the
following increases: a $7.8 million increase in COVID-19 related materials and
supplies, a $5.5 million increase in personnel related costs, a $1.5 million
increase in temporary labor costs, a $1.0 million increase in facility expenses,
a $0.4 million increase in sample cost allocations, a $0.2 million increase in
preventive equipment maintenance and a $0.1 million increase in miscellaneous
indirect costs. Cost of revenues are comprised of, but not limited to, expenses
related to personnel costs, materials, shipping and other direct costs, as well
as equipment depreciation and software amortization expenses.

Research and Development Expenses. Research and development expenses were
approximately $5.0 million for the year ended December 31, 2021, compared with
approximately $5.2 million for the year ended December 31, 2020, a decrease of
approximately $0.3 million or 5%. The decrease was primarily attributable to a
decrease in research and development materials of approximately $0.3 million, a
decrease of temporary labor of approximately $0.2 million, and a decrease in
facility costs of approximately $0.1 million, partially offset by an increase in
personnel costs of approximately $0.3 million. The decrease in materials and
facility costs is due to refocusing our genomic assay development in areas of
development that were not as expensive and decreasing the activities in our
translational lab due to relocating our facilities which delayed ongoing
research by a couple of months. The decrease in temporary labor was offset with
the increase in personnel costs due to hiring additional full-time
employees. Research and development expenses are comprised of, but not limited
to, personnel costs, material, shipping, other direct costs, computer and
laboratory equipment maintenance and facility related costs.

General and Administrative Expenses. General and administrative expenses were
approximately $12.6 million for the year ended December 31, 2021, compared with
approximately $10.0 million for the year ended December 31, 2020, an increase of
approximately $2.6 million, or 26%. The overall increase is due to the
following: a $1.5 million increase in personnel costs, a $0.8 million increase
in billing and insurance software expenses, a $0.7 million increase in office
expenses, which are directly related to support COVID-19 testing, and a $0.3
million increase in legal and patent expenses, a $0.1 million increase in
directors and officer's liability insurance and $0.1 million increase in audit
fees. These expenses were offset by: a $0.7 million decrease related to a
reduction in proxy support services, a $0.1 million decrease in outside services
expenses and a $0.1 million decrease in facility expenses. General and
administrative expenses are comprised of, but not limited to, personnel costs,
facilities, depreciation, repairs and maintenance costs, stock-based
compensation expenses, patent and legal costs, accounting and audit fees, as
well as insurance, office and other expenses.

Sales and Marketing Expenses. Sales and marketing expenses were approximately
$8.3 million for the year ended December 31, 2021, compared with approximately
$6.4 million for the year ended December 31, 2020, an increase of approximately
$1.9 million, or 30%. The increase was primarily attributable to higher sales
commissions of approximately $1.2 million, due to higher revenues during the
period, an increase of approximately $0.4 million in personnel costs, due to an
increase in headcount, an increase in tradeshow expenses of approximately $0.2
million and an increase in office expenses of approximately $0.1 million. Sales
and marketing expenses are comprised of, but not limited to, personnel costs,
trade show and other marketing related expenses, as well as office supplies and
other costs.

Interest Expenses. Interest expenses were approximately $0.3 million for the
year ended December 31, 2021, compared to approximately $0.2 million for the
year ended December 31, 2020, representing an increase of less than $0.1
million, or 22%. Interest expenses are comprised of interest incurred related to
finance leases used to obtain equipment. For the year ended December 31, 2021,
the Company entered seven additional financed equipment leases.

Warrant Inducement and Other Expenses. There were no warrant inducement and
other expenses for the year ended December 31, 2021 compared with approximately
$2.1 million for the same period in 2020, a decrease of $2.1 million, as there
were no inducement warrants issued for the period ending December 31, 2021.





                                       84
--------------------------------------------------------------------------------

income tax expense

Except as disclosed below, over the past several years we have generated
operating losses in all jurisdictions in which we may be subject to income
taxes. As a result, we have accumulated significant net operating losses and
other deferred tax assets. Because of our history of losses and the uncertainty
as to the realization of those deferred tax assets, a full valuation allowance
has been recognized. Due to the suspension of California's net operation loss
utilization for 2021, we have accrued as of December 31, 2021 a current income
tax provision of $0.1 million.

We have not completed a study to assess whether an ownership change has occurred
or whether there have been multiple ownership changes since our formation, due
to the complexity and cost associated with such a study, and the fact that there
may be additional ownership changes in the future, however, we believe multiple
ownership changes likely occurred. As a result, we have estimated that the use
of our net operating loss is limited and the remaining net operating loss
carryforwards and research and development credits we estimate can be used in
the future remain fully offset by a valuation allowance to reduce the net asset
to zero.

Inflation

We do not believe that inflation has had a material adverse effect on our business or results of operations during the periods presented.

Cash and capital resources

We are actively working to improve our financial position and enable the growth
of our business, by raising new capital and generating revenues. As the year
2021 progressed, we experienced significant growth in our COVID-19 testing
volumes and related revenues (as noted above, the commercial accessions
delivered for the years ended December 31, 2021 and 2020 were 532,520 and
191,461, respectively, of which 528,917 and 187,764 respectively, were related
to RT-PCR COVID-19 testing), which allowed us to generate positive cash flow
from operations in 2021, and accumulate $28.9 million of cash on hand as of
December 31, 2021. While we contemplate a reduction of COVID testing revenue in
2022 going forward, our projections indicate sufficient capital to carry the
business through the first quarter of 2023.

In May 2020, the SEC declared effective a shelf registration statement filed by
us. This shelf registration statement allows us to issue any combination of our
common stock, preferred stock, debt securities and warrants from time to time
for an aggregate initial offering price of up to $100.0 million. In May 2021, we
entered into a Controlled Equity OfferingSM Sales Agreement, or the Sales
Agreement, with Cantor Fitzgerald & Co., or the Sales Agent, under which we may
issue and sell from time to time up to $25.0 million of our common stock through
or to the Sales Agent, as sales agent or principal. Any sale of shares of our
common stock under the Sales Agreement will be made under our shelf registration
statement on Form S-3. Sales of our common stock under the Sales Agreement are
made at market prices by any method that is deemed to be an "at the market
offering" as defined in Rule 415(a)(4) under the Securities Act of 1933, as
amended. As of December 31, 2021, $10.2 million of our common stock remained
available for sale under the Sales Agreement.

Cash flow

Our net cash flows from operating, investing and financing activities for the periods below were as follows (in thousands):

                                 For the year ended December 31,
                                    2020                  2021

Cash provided by/(used in):
Operating activities          $        (19,786 )     $        3,690
Investing activities                      (867 )             (1,572 )
Financing activities                    25,720               12,378
Net increase in cash          $          5,067       $       14,496


Cash Used/Provided by Operating Activities. Net cash provided by operating
activities was approximately $3.7 million for the year ended December 31, 2021,
compared to net cash used in operating activities of approximately $19.8 million
for the year ended December 31, 2020. The increase in the cash provided by
operating activities of approximately $23.5 million was primarily due to the
decrease in our net loss of approximately $15.0 million for the period ended
December 31, 2021.

                                       85
--------------------------------------------------------------------------------
Furthermore, cash provided by operations increased due to an increase from the
prior year for the following expenses: Depreciation and amortization of
approximately $1.6 million, and stock-based compensation of approximately $2.5
million which was offset by a decrease in accrued liabilities of $0.1 million
and warrant inducement expense of approximately $2.1 million as there were no
warrant inducements issued for the period ending December 31, 2021.

Cash Used in Investing Activities. Net cash used in investing activities was
approximately $1.6 million for the year ended December 31, 2021, compared to net
cash used in investing activities of approximately $0.9 million for the year
ended December 31, 2020 which is predominately related to an increase in lab
equipment purchases.

Cash Provided by Financing Activities. Net cash provided by financing activities
was $12.4 million for the year ended December 31, 2021, compared to net cash
provided by financing activities of $25.7 million for the year ended December
31, 2020. Our primary sources of cash from financing activities during the year
ended December 31, 2021 consisted of net proceeds of $14.1 million from the sale
of our common stock pursuant to the Sales Agreement. Net proceeds from financing
transactions during the year ended December 31, 2021 were partially offset by
approximately $1.8 million of principal payments made on financed leases and
supplier indebtedness.  Our primary sources of cash from financing activities
during the year ended December 31, 2020 consisted of the sale of our common
stock in three financing transactions in March and April 2020, as well as the
exercise of common stock warrants. Net proceeds from financing transactions
during the year ended December 31, 2020 were partially offset by $1.5 million of
principal payments made on finance leases and indebtedness.

Significant liquidity, capital resources and cash requirements

We expect to continue to incur substantial operating losses in the future. We
expect that we will use the net proceeds from our sale of equity securities, if
any, cash received from the licensing of our technology, if any, and our
revenues from operations to hire sales and marketing personnel, support
increased sales and marketing activities, fund further research and development,
clinical utility studies and future enhancements of our assays, acquire
equipment, implement automation and scale our capabilities to prepare for
significant assay volume, for general corporate purposes and to fund ongoing
operations and the expansion of our business, including the increased costs
associated with expanded commercial activities. We may also use the net proceeds
from our sale of equity securities, if any, cash received from the licensing of
our technology, if any, and our revenues from operations to acquire or invest in
businesses, technologies, services or products, although we do not have any
current plans to do so.

In May 2020, the SEC declared effective a shelf registration statement filed by
us. The shelf registration statement allows us to issue any combination of our
common stock, preferred stock, debt securities and warrants from time to time
for an aggregate initial offering price of up to $100.0 million.

In May 2021, we entered into the Sales Agreement with the Sales Agent, under
which we may issue and sell from time to time up to $25,000,000 of our common
stock through or to the Sales Agent, as sales agent or principal. Sales of our
common stock under the Sales Agreement are made at market prices by any method
that is deemed to be an "at the market offering" as defined in Rule 415(a)(4)
under the Securities Act of 1933, as amended. During 2021, we received net
proceeds of $14.1 million from the sale of our common stock pursuant to the
Sales Agreement. As of December 31, 2021, $10.2 million of our common stock
remained available for sale under the Sales Agreement.

As of December 31, 2021, our cash totaled $28.9 million. The COVID-19 testing
revenue during 2020 and 2021 has provided us with increased levels of cash
inflows from operations. However, we are currently seeing reduced demand for our
COVID-19 testing services and expect this trend to continue absent a negative
and sustained turn in the course of the pandemic.  As a result, we believe that
based on our current and planned cash usage, along with current COVID-19 testing
revenues, our cash balances will support our operations for at least the next 12
months. As such, we determined that it is not probable based on projected cash
flows that substantial doubt about our ability to continue as a going concern
exists for the one-year period following the date that the financial statements
for the year ended December 31, 2021 were issued. The COVID-19 pandemic
continues to evolve, and the extent to which COVID-19 may impact the Company's
business will depend on future developments, including whether the number of
cases continues to decrease, the potential emergence of new variants, and
testing policies of governments, businesses and schools. While the Company
experienced increased revenue levels in 2020 and 2021 related to its COVID-19
testing business and attained net income in the fourth quarter in 2020 and in
the first quarter of 2021, these results are not expected to be indicative of
future results as the COVID-19 pandemic subsides.

                                       86
--------------------------------------------------------------------------------
We expect that we will need additional financing to execute on our current or
future business strategies beyond the next 12 months. Until we can generate
significant cash from operations, including assay revenues, we expect to
continue to fund operations with the proceeds from offerings of our equity
securities or debt, or transactions involving product development, technology
licensing or collaboration. For example, we have an effective shelf registration
statement on file with the SEC which allows us to issue any combination of our
common stock, preferred stock, debt securities and warrants from time to time
until expiration in May 2023. The specific terms of additional future offerings,
if any, under this shelf registration statement would be established at the time
of such offerings. We can provide no assurances that any sources of a sufficient
amount of financing will be available to us on favorable terms, if at all. If we
are unable to raise a sufficient amount of financing in a timely manner, we
would likely need to scale back our general and administrative activities and
certain of our research and development activities. Our forecast pertaining to
our current financial resources and the costs to support our general and
administrative and research and development activities are forward-looking
statements and involve risks and uncertainties. Actual results could vary
materially and negatively as a result of a number of factors, including:
  • the impact of the COVID-19 pandemic on our business;


  • our ability to secure financing and the amount thereof;


  • the costs of operating and enhancing our laboratory facilities;

• the costs of developing our internal sales and marketing forecasts

capabilities;

• the scope, progress and results of our research and development programs,

including clinical utility studies;

• the scope, progress, results, costs, schedule and results of the clinical study

utility studies for our diagnostic tests;

• our ability to control the manufacturing costs of our microfluidic channels;

• the costs of maintaining, expanding and protecting our intellectual assets

real estate portfolio, including potential litigation costs and liabilities;

• our ability to obtain adequate reimbursement from governments and other

third-party payers for our tests and services;

• additional general and administrative staff costs, including

accounting and finance, legal and human resources, by becoming

        a public company;



  • our ability to collect revenues; and


  • other risks discussed in our other filings with the SEC.


We may raise additional capital to fund our current operations and to fund
expansion of our business to meet our long-term business objectives through
public or private equity offerings, debt financings, borrowings or strategic
partnerships coupled with an investment in our company or a combination thereof.
If we raise additional funds through the issuance of convertible debt
securities, or other debt securities, these securities could be secured and
could have rights senior to those of our common stock. In addition, any new debt
incurred by us could impose covenants that restrict our operations. The issuance
of any new equity securities will also dilute the interest of our current
stockholders. Given the risks associated with our business, including our
unprofitable operating history and our ability or inability to develop
additional assays, additional capital may not be available when needed on
acceptable terms, or at all. If adequate funds are not available, we will need
to curb our expansion plans or limit our research and development activities,
which would have a material adverse impact on our business prospects and results
of operations.

© Edgar Online, source Previews


Source link

Comments are closed.